Institutional antecedents and performance consequences of influence strategies in export channels to Eastern European transitional economies

Journal of Business Research 59 (2006) 525 – 534

Institutional antecedents and performance consequences of influence strategies in export channels to Eastern european transitional economies Cristian Chelariu a, Daniel C. Bello b,*, David I. Gilliland c,1 b

a Schulich School of Business, York University, Canada RoundTable Research Professor, Department of Marketing, Robinson College of Business, Georgia State University, Atlanta, GA, 30303, United States c College of Business, Colorado State University, United States

Received 25 October 2004; accepted 31 October 2005

Abstract This study examines how the institutional environment of transitional economies impacts institutional arrangements in the form of influence strategies employed by Western exporters in managing relationships with local firms. Reflecting environmental components, a Western firm’s understanding of Eastern Europe’s regulatory volatility, foreignness, and partner’s control locus is posited to impact economic performance by affecting key coercive and non-coercive influence strategies. A model specifying the effects of the institutional environment on economic outcomes is developed and tested on data from US exporters to Eastern Europe. A structural equation analysis indicates institutional components have a differential impact on the influence strategies employed by these Western firms and on export performance. In particular, use of coercive legalistic pleas is increased by regulatory volatility but reduced by perceived foreignness while use of non-coercive recommendations is increased by the partner’s external locus of control but not by perceived foreignness. Importantly, the institutional environment’s impact on economic performance is shown to be direct as well as indirect through the influence strategies Western firms employ in Eastern Europe. The study concludes with a discussion of implications for managers and researchers. D 2005 Elsevier Inc. All rights reserved. Keywords: Export channels; Transitional economies; Institutional environment; Influence strategies

The reform process in transitional economies entailing decentralization, privatization, and opening of the economy to international trade has had a positive impact on the business opportunities available to foreign exporters (Dahab and Gentry, 1999). Yet in penetrating the markets of Eastern Europe, exporters must overcome a variety of problems associated with the unique institutional context of transitional economies. The fall of the Communist system left an institutional vacuum as regulations and societal norms were no longer appropriate for the new political, economic and social realities. Essentially, ‘‘actors in the post-socialist context are rebuilding organizations and institutions not on the ruins of communism but with

* Corresponding author. Tel.: +1 404 651 4190; fax: +1 404 651 4198. E-mail address: [email protected] (D.C. Bello). 1 The third author acknowledges that a significant portion of this manuscript was completed while he was a visiting faculty member at Aston University, Birmingham, UK. 0148-2963/$ - see front matter D 2005 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusres.2005.10.009

the ruins of communism.’’ (Stark, 1997, p. 36). Unlike other developing countries with a long history of private property and a capitalist system, transitional economies in Eastern Europe have had to implement these new social institutions at the same time with their international opening, practically ‘‘rebuilding the ship at sea’’ (Elster, 1998). For Western exporters attempting to develop Eastern European markets, overcoming institutional obstacles is a difficult but necessary step in working effectively with local trading partners. This task is made more difficult because transitional economies of Eastern Europe are quite different one from another with respect to both economic and institutional transition, as a result of pursuing the reform process at different speeds and with varying degrees of success (Zurawicky and Becker, 1994). Achieving profitable sales growth in these transitional economies requires the Western exporter and its local partner to implement a product’s marketing strategy by closely coordinating their activities and adapting business tasks to local conditions. However, coordi-

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nating and adapting an exported product’s strategy in Eastern Europe are challenged by the complex regulatory, normative, and cognitive components of the institutional environment in these transitional markets. Institutional theorists (North, 1990; Scott, 2001) identify these macro-level aspects of society as the key forces defining courses of action open to firms by limiting and empowering legitimate behaviors. While extensively studied in law and institutional economics, the impact of the institutional environment is a virtually unexplored area in the international marketing literature and accounts for relatively few studies in international management (Kostova, 1999; Peng, 2003). From a foreign market entry perspective, there have been relatively numerous studies on joint ventures and foreign direct investments in transitional economies but relatively ‘‘few studies that explore how companies use export strategies to penetrate these markets’’ (Peng, 2000, p. 279). Consequently, the purpose of this research is to examine how the institutional environment of Eastern Europe impacts the influence strategies employed by Western exporters in working with local distributors, as well as the performance consequences of these strategies. Due to their socialist past and limited international experience, local partners tend to lack modern, Western-style business skills (Busenitz et al., 2000), making it difficult for many Eastern European firms to implement the sophisticated marketing strategies developed by exporters. As a result, Western firms attempt to transfer knowledge and strategic organizational practices to their partners by engaging in various strategies to influence local activities and build necessary competencies (Kostova, 1999). Besides attempting to coordinate activities with partners to generate profitable sales growth, Western firms must also focus on claiming their share of the rewards from the export venture. Institutional economists, most notably Williamson (1985), recognize that claiming value can be problematic since trading partners may act opportunistically and selfishly claim a disproportionate share of the value created by the export arrangement. This study will attempt to bring several important contributions to extant theory. By examining the impact of the institutional environment on manifested institutional arrangements we highlight linkages among a transitional economy’s environment, channel management processes within an export dyad, and economic outcomes. Second, we propose that strategies employed by Western exporters to influence their local partners have the potential to partially mediate the impact the institutional environment has on export performance. Finally, we suggest underlying forces that account for the differential effect influence strategies have on the ability of international trading partners to generate profitable sales growth in their Eastern European export venture. The study will first discuss institutional arrangements between the partners in the form of influence strategies, and the institutional environment in the form of regulatory, cognitive and normative antecedents. Subsequently, we introduce hypotheses followed by the methodology section and the discussion of the results. Suggestions for future research and managerial implications are discussed in the last section.

1. Influence strategies in export channels Institutional arrangements are endogenous features of a trading arrangement and refer to ‘‘formal and informal microlevel rules of exchange devised by specific parties to a specific exchange’’ (Carson et al., 1999, p. 115). Gulati and Singh (1998) identify two key concerns for the institutional arrangements involved in managing inter-firm relationships: coordinating tasks and appropriating returns. First, coordination concerns arise from the interdependence of tasks across firms that are necessary to accomplish the goals of the business venture. For an exported product to successfully penetrate Eastern Europe, an exporter requires import partners to execute locally the product’s strategy by performing marketing tasks in an integrated and coordinated fashion with the exporter’s marketing activities. Second, appropriation concerns refer to the ability of the exporter to capture its fair share of the economic value generated by the international operation. Appropriation problems arise because importers may act opportunistically by claiming profits and not sharing cost reductions. While these two problems occur in any inter-firm relationship, the international setting and conditions specific to the transitional economies environment act as magnifiers. First, contextual features such as unstable and evolving regulatory systems raise the potential for opportunistic violations of trading agreements that are difficult for the Western firm to resolve. Contracts specifying costly marketing practices, specific margins and other issues may be violated as local firms attempt to enhance short term profits (Buckberg, 1997). Channel theorists (Frazier and Summers, 1984) define a firm’s attempt to influence its partner to comply with contractual obligations as legalistic pleas. Legalistic pleas involve communications in which the source contends that the nature of the legal contract or informal agreement between the parties either requires or suggests that the target performs a certain action (Boyle et al., 1992). Since enforcement of contractual obligations can be uncertain in Eastern Europe, it is critical for the performance of the Westerner’s export channel that the effectiveness of legalistic pleas in the specific environment of transitional economies be understood. Second, ‘‘benign’’ uncertainty is exacerbated by cognitive and cultural differences between the dyadic partners. While some of these differences can be explained by the lack of understanding of the local market by the exporter, many are rooted in a lack of business knowledge and skills on the part of the local distributor (Busenitz et al., 2000) generating uncertainty with respect to partner’s actions and intentions, and resulting in difficulties as the partners attempt to have a more coordinated relationship. For example, a study done by Hooley et al. (1980) in Hungary, Poland and Bulgaria identified issues such as ‘‘poor understanding of what marketing is about, limited implementation skills and companies being bound in their former traditions’’ (p. 80). To address the problem of poor business skills, exporting firms attempt to transfer knowledge regarding modern marketing, supply chain, and other Western ‘‘best’’ practices (Kostova,

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influence strategies used in the export dyad. The overall model is presented in Fig. 1.

1999). Theorists (Frazier and Summers, 1984) define a firm’s attempt to influence its partner to adopt its suggested business procedures and practices as recommendations. Recommendations involve influence attempts whereby the source firm predicts that the target firm will be more profitable if the target follows the source’s suggestion regarding some specific action or set of actions (Boyle et al., 1992). Just like distributors from other emerging economies value the recommendations provided by international exporters (Kale and Barnes, 1992), distributors from transitional economies are often receptive to applying the recommendations of the Western exporter to improve sales and profits (Fey and Beamish, 1999). Taxonomically, the two influence strategies are opposite: legalistic pleas are coercive (Gundlach and Cadotte, 1994) and do not rely on altering the target’s perception (Frazier and Summers, 1984), while recommendations are non-coercive (Gundlach and Cadotte, 1994) and are based upon altering the target perception (Frazier and Summers, 1984). The importance of this distinction is stressed by knowledge-transfer theorists (Kostova, 1999) who distinguish between the implementation and internalization of the transnational transfer of organizational practices. Implementation refers to the passive application of the knowledge according to instructions while internalization is the active adoption of the practice by the recipient organization (Kostova, 1999). A recipient that mechanically puts into practice a proposal without necessarily agreeing or fully understanding it engages in implementation; a recipient that commits to the practice, is satisfied with it, and embraces it through psychological ownership engages in internalization. Thus, because coercive legalistic pleas are aimed at changing behaviors but not perceptions of the ‘‘target’’ (Frazier and Summers, 1984), they may lead to implementation but are inadequate for promoting internalization of these practices (Kostova, 1999). On the other hand, the non-coercive provision of recommendations has the potential to go beyond mere implementation and bring about internalization of practices because they alter the system of beliefs and attitudes of the influence target (Frazier and Summers, 1984). Consequently, legalistic pleas and recommendations are the crucial influence strategies undertaken as the exporter tackles the uncertainty related to contract enforcement and coordination problems. In the following, we will present the three dimensions of the institutional environment and their hypothesized link to the

Regulatory Volatility

+

2. Hypotheses Institutional environments are exogenous to a trading arrangement, and refer to macro-level aspects of society including the political and regulatory system, cognitive beliefs and knowledge, and cultural norms (Carson et al., 1999). Because ‘‘institutions arise in response to pressures and conditions of a particular era’’ (Grewal and Dharwadkar, 2002, p. 85), the legacy of the communist past continues to pervade many aspects of contemporary institutions in transitional economies (Elster, 1998). From a Western exporters’ perspective, the institutional setting of transitional economies is unfamiliar and troublesome due to the history of collectivism, authoritarianism, and central economic planning. One key problem is an unstable regulatory structure and legal system that creates uncertainty, especially regarding planning for future contingencies (Rosenbaum, 2001). Societal values and social norms reflecting past collectivist and authoritarian regimes represent major institutional hurdles as Western exporters attempt to work with local managers (Peng, 2000; Michailova, 2000). Finally, overcoming fundamental differences in social attitudes and work styles create challenges to exporters in forming and maintaining business relationships in transitional markets (Zurawicky and Becker, 1994, Mehta et al., 2001). Below, the impact of the regulatory, cognitive, and normative aspects of the Eastern European environment on the governance mechanisms employed by Western exporters to influence local partners are formally specified. The regulatory dimension of the institutional environment refers to the rule systems and enforcement mechanisms that manipulate sanctions (punishments and rewards) in order to influence future behavior (Dornbusch and Scott, 1975). As North (1990) observes, this dimension involves ‘‘the state as a source of coercion, a theory of institutions also inevitably involves an analysis of the political structure of a society’’ (p. 64). In transitional economies, the regulatory institution is unstable as governments are in a ‘‘frenzy of law creation’’ (Yakovlev, 1996, p. 8). An explosion of new laws and business regulations add ambiguity and cloud ‘‘the role of the state: as rule maker, referee, and enforcer’’ (Scott, 2001, p. 54).

Legalistic Pleas -

-

Perceived Foreignness -

Locus of Control

+

527

Economic Performance +

Recommendations

Fig. 1. Institutional antecedents and performance consequences of influence strategies in export channels to transitional economies.

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Regulatory volatility captures the rapid and unexpected changes in laws and government policies creating uncertainty in this institutional facet (Buckberg, 2000). Reflecting an unstable regulatory institution, Western exporters cannot be certain their contractual rights will be adequately protected from importer opportunism by local courts and government agencies (Hendrix, 2001). As a form of ‘‘self help’’, exporters directly attempt to influence their partner by employing legalistic pleas to pressure importers to comply with prior agreements (Boyle et al., 1992). The changing bureaucratic and legal requirements in Eastern Europe provide importers with ample opportunities to extract concessions and contract exemptions from their foreign partners. The shifting reality of changing rules and, often, more complicated procedures governing the import business create situations that permit the importer to appropriate economic benefits by attempting to modify initial agreements. Many exporters indicated during the field interviews that it is common for the local distributor to attempt to re-negotiate the contract after an agreement has already been reached. Since formal legal enforcement of agreements is problematic for Westerners (Hendrix, 2001), exporter reaction to regulatory volatility is to use legalistic pleas to remind the distributor about the terms of the initial agreement and to insist that these terms are observed. Consequently, we hypothesize that: H1. Greater regulatory volatility, as perceived by the Western exporter, is positively associated with its use of legalistic pleas toward its Eastern European partner. Because the local importer is most familiar with legal changes in import procedures, it is not likely that regulatory volatility would impact the exporter’s use of recommendations. Further, given the rule-based nature of the regulatory institution where ‘‘the primary mechanism of control is coercion’’ (Scott, 2001, p. 53), legalistic pleas not recommendations are likely to be employed by Westerners. Therefore, we do not hypothesize a relationship between regulatory volatility and the provision of recommendations by the Western exporter. The cognitive dimension of the institutional environment refers to a ‘‘collection of internalized symbolic representations of the world’’ that mediates between ‘‘the external world of stimuli and the responses of the individual organism’’ (Scott, 2001, p. 57). In the context of the export dyad, the two partners, coming from different cultural backgrounds and with a different set of expectations, are likely to interpret differently the various phenomena that occur in the external business environment. East –West culture clashes often reflect inconsistent frameworks of meaning regarding time and work styles, inhibiting communication and coordination between partners (Michailova, 2000). Consequently, this dimension focuses attention on the way an actor’s internal interpretive processes are influenced by the prevailing culture. The perceived foreignness of the intended market (Stottinger and Schlegelmilch, 1998) is defined as inconsistencies between the cognitive frameworks of trading partners and is captured by the degree to which the export firm perceives the environment as unfamiliar from a business culture standpoint.

The greater the perceived foreignness of Eastern Europe, the lesser the ability of Western exporters to operate effectively and efficiently in such transitional marketplaces (Dahab and Gentry, 1999, Stottinger and Schlegelmilch, 1998). Western firms unfamiliar with local business practices and culture face a generalized inability to control and influence native partners who are fully embedded in the local setting. Perceived foreignness is reduced when the exporter’s contact personnel speak the local language and are familiar with the business customs and the working style of the local distributor. Understanding local conditions enables the exporter to (a) fine-tune the substance of its recommendations to the specific situation of the marketplace, and (b) to communicate these recommendations in a clear and culturally sensitive manner. Conversely, when the exporter perceives the local market to be unfamiliar, the use of recommendations would be less likely. H2. Foreignness of the market, as perceived by the Western exporter, is negatively associated with its use of recommendations toward its Eastern European partner. Likewise, greater perceived foreignness makes it increasingly difficult for a Western firm to understand when and how to employ coercive influence strategies. Unfamiliarity with business culture and customs creates uncertainty regarding legalistic pleas since local bureaucratic and legal complexities lessen the tendency for a Western firm to directly intervene and pressure its partner (Fey and Beamish, 1999). However, an environment perceived as familiar enables the exporter to be cognitively better prepared to distinguish between (a) bona fide attempts to re-negotiate the agreement due to unforeseen circumstances and (b) attempts motivated primarily by the local partner’s opportunism. Consequently, cognition of language, business customs and local business practices of the target market enables the exporter to make a more nuanced and more effective use of legalistic pleas when interacting with the local partner, while higher perceived foreignness is expected to inhibit the use of legalistic pleas. H3. Foreignness of the market, as perceived by the Western exporter, is negatively associated with its use of legalistic pleas toward its Eastern European partner. As for the effect of perceived foreignness on export performance, the analysis to this point has focused on indirect effects through influence strategies. As noted, a major purpose of influence strategies is to ensure that interdependent marketing tasks in the export channel are coordinated effectively with the Eastern European partner. To achieve effective implementation, exporters attempt to influence importer actions, ensuring they are aligned with exporting plans. However, lack of familiarity with the market is also posited to have a direct, negative relationship with export performance (Johanson and Valhne, 1977). Apart from implementation issues, high perceived foreignness will also weaken the exporter’s ability to develop optimal marketing strategies for the transitional market in the first place, directly lowering performance (Michailova, 2000). Greater perceived foreignness increases the likelihood that the marketing strate-

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gies Western firms attempt to deploy in Eastern Europe will be inadequate and poorly adapted to local conditions. This negative, direct relationship has been supported in more recent studies (Bello et al., 2002). Consequently, we propose that: H4. Foreignness of the market, as perceived by the Western exporter, is negatively associated with export performance. The normative component of the institutional environment refers to ‘‘social norms, values, beliefs and assumptions that are socially shared and are carried by individuals’’ (Kostova, 1997). Characterizing this institutional facet is the locus of control preference, which represents an internalized normative expectation that prescribes behaviors, based on the individual attribution of the locus of events, as determined internally by his/her own behavior vs. external powerful entities (Rotter, 1966). The individual’s beliefs about his or her control over the environment might range from weak (external locus of control) to strong personal, or internal, control. Locus of control is highly relevant in the context of the shift from work related values shaped by the centrally planned economy to values emphasizing individualism, risk taking, and entrepreneurship, more appropriate for a market economy (Kaufmann et al., 1995). Moreover, the Western assumption of a normative preference for an internal locus of control might not necessarily apply in other cultures. For example, Russian managers were found to be more autocratic and to encourage less participation in decision making than Finnish managers (Fey et al., 2001). Similarly, research in a Polish setting showed that directive leadership in marketing channels was associated with high performance while participatory or supportive leadership generates better results in US or in Finland (Mehta et al., 2001). As a normative reflection of their communist past, Eastern Europeans tend to be high on collectivism and power distance (Hofstede, 1980). In contrast, people from individualistic societies tend to focus more on themselves, to be independent and self-reliant. They believe in their ability to control their achievements and success in life. Of course, the opposite is true for collectivistic cultures. In large power distance societies, people expect and accept that power is distributed unequally, demonstrate high tolerance for lack of personal autonomy, and attach great importance to prestige, wealth and power (Hofstede, 1980). They also prefer the centralization and formalization of authority, show more tolerance in accepting the decisions of authority figures and tend to avoid arguments with management hierarchy (Kale and Barnes, 1992). The business knowledge that the exporter has with respect to various marketing activities involved in product distribution, such as brand management, sales, advertising or promotion, confers expert power to the exporter in its relationship with the local distributor. If the exporter perceives the local distributor to have an external locus of control and likely to acquiesce to influence strategies, the exporter can leverage its expert power and make recommendations to the local distributor regarding appropriate business practices. Consequently, H5. Greater external locus of control of the local distributor, as perceived by the Western exporter, is positively associated with

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its use of recommendations toward its Eastern European partner. No relationship is posited between the importer’s locus of control and the use of legalistic pleas by the exporter. An equivocal relationship exists between these factors since an external locus would, on the one hand, generally lead to contractual compliance by the importer, negating the need for the exporter to exert extra compliance pressure via legalistic pleas. On the other hand, an exporter’s awareness of its partner’s external locus would increase the likelihood of its acquiescence to additional pressure, increasing the perceived efficacy of the influence strategy and predisposing the exporter to employ legalistic pleas. Hence, no definitive linkage is posited given the off-setting pressures of the ex ante tendency for initial compliance versus the ex post perceived efficacy of legalistic pleas. 3. Influence strategies and performance consequences Relatively few studies have analyzed the relationship between influence strategies and performance. In a domestic US context, Boyle and Dwyer (1995) found that legalistic pleas have a detrimental impact on performance, while the positive relationship between recommendations and performance that was initially hypothesized proved not significant. The extant literature has mostly analyzed influence strategies as predictors of compliance (Venkatesh et al., 1995) dyadic relationalism (Boyle et al., 1992) and partner satisfaction (Keith et al., 1990). For example, Mayo et al. (1998) found that non-coercive influence strategies, such as provision of suggestions intended to help the partner, is positively related to partner satisfaction while coercive strategies such as legalistic pleas is negatively related to satisfaction. Boyle et al. (1992) found that recommendations are positively related to relationalism, while legalistic pleas are negatively related to relationalism. Thus, research has focused largely on the impact of influence strategies on relationship quality issues (i.e., satisfaction, relationalism, etc.) rather than on economic outcomes such as the channel partners’ ability to generate profitable sales growth. In the context of Eastern Europe, we suggest that economic performance of the export venture reflects the ability of the partners to coordinate and adapt their interdependent tasks to unique local market conditions (Gulati and Singh, 1998). By stimulating coordination and adaptation, recommendations by Western exporters are expected to raise performance. Performance improves because non-coercive recommendations tend to be perceived as legitimate attempts to create value for the venture through the transfer of advanced marketing knowledge, rather than as selfish attempts by the exporter to claim value. Since local firms perceive recommendations as helpful to their operations, recommended practices are not just implemented but internalized, greatly enhancing local adaptation and coordination (Kostova, 1999). In contrast, local firms tend to perceive coercive legalistic pleas as the exporter’s attempt to claim value and appropriate profits by enforcing obligations and contract terms. Insisting on contractual compliance may

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lead to implementation of specified practices but is unlikely to yield the internalization and adaptation associated with strong performance (Kostova, 1999). Thus, based on past research, the following relationships between the focal influence strategies and export performance can be made.

Table 1 shows some of the characteristics of our sample, including size of the firm, scope of export operations, years of export experience, and country of the most important Eastern European partner. The exported products cover a large array, including both consumer and industrial products.

H6. Greater use of recommendations by the exporter is positively associated with export performance.

5. Statistical modeling and results

H7. Greater use of legalistic pleas by the exporter is negatively associated with export performance.

4. Methodology The first step in the data collection was the fieldwork stage, consisting of thirty-five in-depth interviews with US exporters to Eastern Europe. The insights gathered allowed us to ensure a full specification of the model and to develop the questionnaire. The exploratory interviews were followed by the development of a formal survey of US export managers. After a pre-test on a new sample of forty-seven respondents, several modifications were made on the original questionnaire to ensure the validity of the measures. The final questionnaire measures US exporters’ perceptions about (a) the target country institutional profile, comprising regulatory volatility, perceived foreignness of the market and locus of control, (b) the use of influence strategies, and (c) economic performance. Existing scales were used for influence strategies (Boyle et al., 1992) and performance (Bello and Gilliland, 1997), while the scales measuring the three dimensions of the institutional environment in the export context were created specifically for this study. 4.1. Data collection The sampling frame consists of export managers of US industrial manufacturers who are responsible for managing the relationship with distributors from the transitional economies of Eastern Europe and the former Soviet Union. A total of 747 firms exporting to Eastern Europe were selected from three lists created by the Journal of Commerce, the Department of Commerce, and the Federation of Trading Companies. Of these, 394 reported they no longer export, do not have any experience in dealing directly with Eastern Europe, or declined to participate in the survey. In order to identify key informants from the initial sample, a telephone pre-notification and screening procedure was used. This procedure insured that (1) firms selling with their own sales force are eliminated from the survey and (2) a participation commitment is obtained from the responding managers. The next steps in the data collection procedure included: a pre-notification phone call, the mailing of the questionnaires (n = 353), a reminder post card after one week, a non-respondent phone call after 3 weeks, followed by a second wave of questionnaires. After the initial mailing and the remainder, 188 firms returned the questionnaire. Eight questionnaires were deemed non-usable due to a large number of unanswered items, generating a final response rate of 51%.

Fig. 1 depicts the path diagram for the present study. To test the model, we follow the approach described by Anderson and Gerbing (1988). First, we run a measurement model relating the questionnaire items to the corresponding variables. This step insures that the measures have convergent and discriminant validity. The second step is the estimation of the structural model and the testing of the hypotheses. Both models are tested using Lisrel 8.5. The results of the structural equation modeling are presented in Tables 2 and 3. Our study finds overall support for the proposed structural model, as evidenced by various fit indices (Chi2(142) = 179.45; GFI = 0.90; RMSEA= 0.039; RMR = 0.069; CFI = 0.98). In the following paragraphs, we discuss each hypothesis separately. As expected, Hypothesis 1, linking regulatory volatility and legalistic pleas, is found significant and positive (t = 2.07, p = 0.039). Thus, in conditions of higher regulatory volatility, the exporter is likely to use legalistic pleas to try to preserve the terms of its initial agreement with the distributor. Hypothesis 2, predicting a negative relationship between perceived foreignness and the use of recommendations in the export dyad, is not supported (t = 1.38, p = 0.169) although the sign is in the expected direction. Hypothesis 3, predicting a negative relationship between perceived foreignness and the use of legalistic pleas in the export dyad, is supported (t = 2.63, p = 0.009). Hypothesis 4, predicting a negative, significant path Table 1 Sample characteristics Sample characteristics Size (number of employees) Less than 10 Between 10 and 59 Between 60 and 400 More than 400 Export experience (number of years) Less than 10 years Between 10 and 20 years Between 20 and 30 years More than 30 years Scope of export operation (number of countries) Less than 10 countries Between 10 and 30 countries More than 30 countries Country of C.E.E. importer Russia Poland Czech Republic Hungary Othersa

Percentages (%) 20 30 30 20 27 30 30 23 30 30 40 40 20 9 5 23

a Including Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia, Slovenia, countries from the former Yugoslavia and Ukraine.

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Table 2 Construct measurement summary: confirmatory factor analysis and scale reliability Item description

Stnd. loading

Regulatory Volatility (scale: 1 = Strongly Disagree to 7 = Strongly Agree) In that Eastern European country, 1. Businesspeople often have to cope with unexpected changes in laws, rules or policies. 0.77 2. Unpredictability of laws and regulations present problems for many business operations. 0.90 3. The legal system in that country is volatile and unstable. 0.85 Perceived Foreignness (scale: 1 = Strongly Disagree to 7 = Strongly Agree) One or more people from our firm who are involved in dealing with our Eastern European partner, 1. . . . understand and speak the language of our partner. (reversed) 0.74 2. . . . are familiar with day to day living in that country. (reversed) 1.00 3. . . . understand the working style of people in that country. (reversed) 0.86 Locus of Control (semantic differential scale: 1 = Strongly Internal to 7 = Strongly External) Thinking about the personnel of your main partner firm, would you say that they . . . 1. think that their life is controlled by themselves . . . controlled by others 0.64 2. like to be in charge. . .like to follow orders 0.87 3. like to be self reliant. . .like to rely on authorities 0.96 4. like to master their own destiny. . .like to do what they are told to do 0.96 Recommendations (scale: 1 = Very Seldom to 7 = Very Often) When making suggestions to our partner, 1. . . . we make it clear that by following our recommendations, their business would benefit. 0.91 2. . . . we make it explicit, when making a suggestion, that it is intended for the good of their operations. 0.93 3. . . . we explain to them the logic for expecting success from a specific action that we suggest. 0.83 Legalistic Pleas (scale: 1 = Very Seldom to 7 = Very Often) Regarding our informal agreement or contract that we have with our partner: 1. . . .we refer to our agreement when their actions are inappropriate. 0.95 2. . . .we remind them of any obligations stipulated in our agreement. 0.97 3. . . .we refer to portions of our agreement to gain their compliance on a particular request. 0.90 Economic Performance (scale: 1 = Very Poorly to 7 = Very Well) How effectively do you and your partner accomplish your firm’s market development goals in this Eastern European country: 1. Sales Goals 0.95 2. Profit Goals 0.88 3. Growth Goals 0.89 Goodness of Fit Indices: Chi2(137) = 171.45; GFI = 0.91; RMSEA= 0.038; RMR = 0.14; CFI = 0.98.

unmediated by influence strategies, linking perceived foreignness and performance, is also supported (t = 4.44, p = 0.00). As predicted by Hypothesis 5, higher external locus of control of the local partner is associated with greater use of recommendations in the export dyad (t = 2.41, p = 0.017).

t-value

Reliability .87

11.44 14.16 13.07 .89

11.16 17.72 13.82 .91

9.34 14.42 17.06 17.14 .92

15.28 15.96 13.33 .96

16.96 17.45 15.41 .93 16.73 14.63 14.86

In terms of the impact that the two influence strategies have on performance, Hypothesis 6 is supported (t = 2.81, p = 0.005). The use of recommendations enhances the performance of the local distributor. However, the negative path between legalistic pleas and performance (H7) is not supported (t = 1.50, p = 0.135),

Table 3 Structural model Linkages in the model

Hypotheses

Theoretical model

Number

Sign

Parameter

Exogenous Y Endogenous Variables Regulatory Volatility Y Legalistic Pleas Perceived Foreignness Y Recommendations Perceived Foreignness Y Legalistic Pleas Perceived Foreignness Y Performance Locus of Control Y Recommendations

H1 H2 H3 H4 H5

+ – – – +

c 1,1 c 2,2 c 1,2 c 3,2 c 2,3

0.16 0.11 0.20 0.34 0.19

2.07a 1.38 2.63b 4.44b 2.41a

Between Endogenous Variables Recommendations Y Performance Legalistic Pleas Y Performance

H6 H7

+ –

c 1,4 c 2,4

0.21 0.11

2.81b 1.50

Model Diagnostics: Chi2(142) = 179.45; GFI = 0.90; RMSEA= 0.039; RMR = 0.069; CFI = 0.98. a p < 0.05. b p < 0.01.

Estimate

t-value

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although the sign is in the expected direction. It could be that for some of the respondents, located in countries with a more transparent regulatory system and a stronger normative system of beliefs, reminding the partner about its obligations is, in fact, credible and effective while for others is not. Moreover, in some countries, legalistic pleas might be interpreted quite positively as a sign of decisiveness on the part of the partner. For example in India, a country characterized by high collectivism and high power distance, partner satisfaction is reported to be positively related to the use of both recommendations and legal pleas (Bandyopadhyay and Robicheaux, 1998). As indicated earlier, no theoretical reasons were uncovered to justify paths between regulatory volatility and recommendations, and between locus of control and legalistic pleas. To verify this assumption (Anderson and Gerbing, 1988), we compare our theoretical model MT (shown in Fig. 1) with two unconstrained alternative models MU1 and MU2 that do not confine the antecedents to each type of influence strategy. For each of the two models we run a chi-square analysis to test the null hypotheses: MT – MU = 0. For the MU1 model (where Recommendations has three antecedents), the test is nonsignificant (chi-square difference of 2.96 for 1 df). For the MU2 model (where Legalistic Pleas has three antecedents), the test is also non-significant (chi-square difference of 0.45 for 1 df). Thus, our initially hypothesized restrictions regarding institutional antecedents to channel influence strategies are supported. 6. Discussion of results Consistent with prior research, our results demonstrate that an exporter’s unfamiliarity with a foreign culture directly lowers the performance of an export venture. However, unlike prior research, we position this expected finding in the larger context of the overall institutional environment of the foreign market, accounting not just for cultural effects but also for regulatory and normative differences. Importantly, our empirical findings demonstrate that each environmental facet has a unique, indirect effect on performance by impacting the way Western exporters attempt to influence their local Eastern European partners. Thus, the forces that impact a Western firm’s efforts to penetrate these transitional economies are complex, not limited to direct cultural effects but also encompass other institutional facets as well as governance mechanisms utilized to influence local marketing activities. In this way, the research findings provide theoretical insights into the linkages among a transitional economy’s environment, the channel management processes within the export dyad, and the economic outcomes of the export venture. Regulatory volatility characterizing many Eastern European countries is shown to increase use of legalistic pleas by Western firms as these exporters implement their export plans in transitional markets. Exporters are thought to rely on coercive pleas because shifting regulations provide local importers with opportunities to extract concessions while making it difficult for exporters to assess the extent failure to comply with agreements is justified by changing conditions. As

hypothesized, we find exporters increasingly employ legal pleas to pressure local partners to fulfill their obligations as regulatory uncertainty increases. However, exporter unfamiliarity with the local culture is shown to reduce the use of legalistic pleas. Perceived foreignness lessens this coercive intervention because it weakens an exporter’s ability to distinguish between legitimate requests for contractual relief and mere opportunistic reneging on commitments. Further, increased use of legalistic pleas is negatively, but not significantly, associated with export performance. Although theory suggests pleas do not effectively coordinate tasks because importers resist such coercive tactics, the lack of significant findings demonstrates that insistence on contract compliance does not necessarily reduce export performance in the Eastern European context. Reflecting the normative environmental component, perceptions that the local partner has an external locus of control are associated with the use of recommendations as an influence strategy. As hypothesized, partners thought to possess a greater external locus receive more suggested changes designed to enhance their local operations. The finding is consistent with the notion that local actors with an external locus are more receptive to suggestions, and will implement and internalize recommendations (Kostova, 1998; Rotter, 1966). In contrast, the expectation that perceived foreignness discourages Western firms from making recommendations is not supported. Apparently, unfamiliarity with cultural issues does not affect exporter use of recommendations as a way to influence the operations of a local partner. Perhaps cultural unfamiliarity fails to deter exporters from making suggestions because, as our data demonstrate (H6 acceptance), Western firms employing recommendations are shown to experience superior export performance. Theory suggests this occurs because local partners, perceiving such non-coercive influence as legitimate aides to business, internalize suggestions and enhance channel coordination, yielding profitable sales growth. 7. Directions for future research The present study answers the call for more integration of the institutional perspective in business strategy studies made by some of the influential scholars in the area of transitional economies (Peng, 2000). Future studies might attempt to use different variables to account for the three dimensions of the institutional environment. In the present study, we focus on regulatory volatility, referring to unexpected changes in the import – export regulations. Additional studies might focus on the local courts’ capacity and willingness to enforce contracts, or on the amount of red tape and corruption faced when dealing with local officials. Future studies also could analyze the impact of cognitive and normative variables by using different constructs or different operationalizations for the same constructs. The present model has a series of limitations that could be addressed by future research. In terms of institutional arrangements, the present study employs legalistic pleas and recommendations to represent coercive and non-coercive attempts. Future studies could use other influence strategies, such as

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warnings and incentives, or alternatively, focus on relational variables such as the presence of social norms in the dyad. In terms of outcome variables, the present study only analyzes economic performance. Future studies could look at broader performance implications, such as conflict, cooperation, or partner satisfaction. Finally, future studies may also analyze potential moderators of the present model including the foreign orientation of the export manager, attitude towards risk, and the level of experience in exporting to transitional economies or other emergent economies. 8. Managerial implications Eight of the transitional economies of Central and Eastern Europe have joined the European Union in, 2004, an outcome based on a successful reform process from both an economic, and perhaps more importantly, an institutional standpoint. Continued institutional change and development are likely across Eastern Europe making it crucial for Western managers to understand the impact institutional facets have on export operations and performance. In fact, our empirical findings suggest Western exporters must adopt a fine-grained analysis of transitional markets since institutional elements tend to have unique, and sometimes opposing, effects on institutional arrangements between trading partners. The study also indicates it is important for managers to understand the differential effect influence strategies have on the way a local partner responds to a Westerner’s intervention into its local operations. Whether the Eastern European firm internalizes foreign business knowledge or merely implements it in a limited manner has important implications for the way a Western exporter’s marketing strategy is executed locally. Also critical to the quality and performance of the trading relationship is the local firm’s perception of the Westerner’s influence either as a helpful aide to business or as a veiled attempt to appropriate economic returns. As our data suggest, use of coercive legalistic pleas and non-coercive recommendations have a dynamic and multi-faceted impact on the coordination and appropriation concerns of channel members. Furthermore, the choice of influence strategies should take into account the possible reaction of a partner motivated by local institutional factors. For example, we find that in dealing with local distributors who normatively believe their life is dominated by powerful outside actors, Western exporters are more likely to employ recommendations, however, this particular trait is shown to have no impact on the use of legalistic pleas. To conclude, an institutional perspective focusing on ‘‘softer’’ factors of the business environment appropriately complements the typical country benchmarking based primarily on ‘‘hard’’ economic indicators. That is, hard financially oriented indicators of export market attractiveness such as GDP per capita and purchasing power must be considered in the context of regulatory, normative, and cultural institutional forces. Hence, for Western firms contemplating export ventures to these transitional markets, a full understanding of institutional forces is crucial to managing local business relationships in a highperformance manner.

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