Institutional Differences

Adaptation and development both refer to process and, as such, proceed according to the logic of one of four drivers of change designated as lifecycle, teleological, dialectic and evolutionary (Van de Ven and Poole, 1995). The lifecycle theory of change entails the unfolding of a process according to predictable stages. Teleological theory emphasizes coordination amongst parties interested in achieving a goal while the dialectical process results in change arising from negotiation and compromise amongst conflicted parties. Finally, evolutionary theory focuses on continuous change through variation, selection and retention.

Dialectical sources of change are, at least implicitly, the most focused upon drivers of practice adaptation in international transfers (Jensen and Szulanski, 2004; Kostova and Roth, 2002). Conducting business in a foreign market involves tradeoffs between local responsiveness and global efficiency. Some of the great benefits from conducting business internationally are the gains from scale economies and efficient asset allocation (Lawrence and Lorsch, 1967). At the same time, it is generally accepted that some degree of local responsiveness is required in order to successfully operate in foreign markets (Bartlett and Ghoshal, 1989; Luo, 2001; Morosini et al., 1998). Adaptation can enhance the legitimacy of an MNE from the perspective of national stakeholders, thus

enabling the firm to overcome the liability of foreignness (Hymer, 1976; Zaheer, 1995). MNEs tend to encounter significant gaps in knowledge concerning the local environment after making the initial investment, and hence successful adaptation requires the ability to absorb local knowledge (Petersen, Pedersen and Lyles, 2008).

Achieving local responsiveness requires adaptation of products, services, and processes for the local market. Although much of the literature has primarily considered production and marketing practices, pressures exist to adapt nearly every practice. Answering the question of how much adaptation is enough largely depends on what is being adapted (Lawrence and Lorsch, 1967). Product adaptation can be achieved with market research and perhaps some trial and error. Herein lies the challenge for adapting innovation practices. Innovation is already difficult to achieve as the various processes of novelty generation are fraught with uncertainty, and efficiency is extremely difficult to assess without tangible outcomes (Adams et al, 2006). Adapting these processes aggravates the uncertainty of value creation through innovation even further. For example, managers attempt to create environments which foster innovativeness amongst employees through various means. These means are socially constructed and institutionally embedded. Cultural and institutional differences between the contexts of innovation practice provider and recipient may inspire adaptation of these means of motivation, but the outcomes cannot be determined ahead of time. This uncertainty could decrease the willingness of the practice provider to accept adaptations requested by the

recipient. Resistance on either side of the transfer to accept or adapt practices provides an additional impediment to overcome in transferring the practice.

Adaptations have been conceived as having two types (Muchinsky, 1977; Roberts and O‟Reilly, 1974). General adaptations affect the overall meaning of the practice while specific adaptations affect certain aspects of the practice, but overall meaning, that is the purpose of the practice, is unaffected. Prior research, concerned with generalizability, has examined the direct influence of institutional and cultural distances between providers and recipients of practices on adaptation, but has not delved deeply into how these differences matter. The research design used in here allows such inferences. Kostova and Roth (2002) found that cognitive and normative differences increased pressures for institutionalization, whereas regulatory differences had no apparent effect. However, that research was constrained to a single type of practice and may not generalize to all practices.

Regulatory regimes govern the manner in which labour is compensated and the relationship between basic research and industry. Hence, national regulatory differences between practice provider and recipient organizational units often will lead to necessary adaptations of the specific type for both external practices, such as partnerships, as well as internal practices. Cognitive differences refer mainly to differences in knowledge, awareness and the value of certain types of practice. Other pressures being equal, where the cognitive environment is favourable the practice should be transferred without much adaptation as subsidiary employees already have an appreciation for it. However, it is

important that members truly understand the value of the practice for this to be the case. Being familiar with a practice without understanding its true value suggests that the practice has more of fashion or fad status within the cognitive environment of the subsidiary (Abrahamson, 1991). Where this understanding is absent, members may readily adopt the practice but unknowingly change its meaning through use. Finally, normative differences refer to differences in what is considered acceptable in practice provider and recipient environments. These differences, if they exist in general, are typically a result of cultural differences. Where a practice is deemed a poor fit, as may be especially the case in HRM practices where incentives effective in one environment have limited or even negative impacts in the recipient organizational unit, pressures for adaptation will exist. It has been shown that subsidiary decision making autonomy, which requires flexibility in the implementation of practices, is an important precondition for customer-oriented innovation (Foss, Laursen and Pedersen, 2011; Foss et al, 2009)

While difficulties in the transfer of knowledge present substantial impediments to practice diffusion, institutionalization of practices can potentially be even more difficult. According to institutional theorists, organizations adopt practices in response to a variety of influences, broadly classified as mimetic, coercive and normative, in order to gain legitimacy (DiMaggio and Powell, 1983; Meyer and Rowan, 1977; Scott, 1987). Mimetic influences are essentially an imitative response to uncertainty. Organizations may also adopt practices imposed upon them by a more powerful actor in the hierarchy (coercive) or because a general belief exists that certain practices are more acceptable

than others within a particular social milieu (normative). Subsidiaries may adopt practices transferred from MNE headquarters in response to either normative or coercive pressures. The extent to which these pressures are experienced is a function of the manner in which the transfer is initiated and also the subsidiary‟s level of resistance.

Resistance by the subsidiary is caused not only by inertia but also by „institutional duality‟ (Kostova and Roth, 2002; Morgan and Kristensen, 2006). This is in reference to the fact that subsidiaries need to respond to both the institutional pressures from a foreign headquarters and to the pressures within their own institutional environment. Just as organizations respond to institutional pressures in order to gain legitimacy, the organizational practice must gain legitimacy within the foreign subsidiary in order to become institutionalized. In the presence of institutional duality, gaining such legitimacy is ultimately more complicated. New practices may not integrate well with current practices, and may counter the commonly held understanding of how things are done in a particular social milieu. Under these conditions, there will be additional pressures to adapt the practice which results in greater challenges for institutionalization (Jensen and Szulanski, 2004).