How to deal with foreign institutions in international markets? New research proposes governance strategies that engender legitimacy and efficiency

New research published in the Journal of Marketing identifies two governance strategies which can deal with foreign institutions so as to secure both social acceptance and firm performance.
Firms engaging in foreign marketing channels are constrained by a set of foreign institutions encompassing rules, routines, conventions, and normative pressures. They face two main challenges that may undercut firm efficiency. First, they cannot foresee what will happen in the market because they do not know the foreign market environments and are unable to evaluate market information. Second, their potential host partners do not recognize them as socially fit partners because the locals do not know and trust them. Thus, firms doing business in foreign markets face a managerial dilemma—namely, how to gain social acceptance (commonly referred to as legitimacy) while safeguarding efficiency.
The findings, appeared in the May 2012 issue of the Journal of Marketing, suggest that firms facing such a managerial dilemma in a foreign market can use two governance strategies, contract customization and/or relational governance, to safeguard local acceptance and performance. The findings based on a sample of Chinese manufacturers who export products through foreign distributors provide a governance solution to the aforementioned managerial dilemma, in that the two governance strategies are found to be able to address the dual issues of legitimacy and efficiency. .
“International channel managers should maintain an integrated management of legitimacy and efficiency in foreign marketing channels,” say study authors Zhilin Yang and Chenting Su both at the City University of Hong Kong, and Kim-Shyan Fam at the Victoria University of Wellington.  “Managers can choose to be legally and/or socially embedded by forming a legal or relational bond with their host partners,
The authors say that managers should pay close attention to the dual functions of the two governance strategies, particularly their legitimacy-building function. Given the legitimacy pressure and market ambiguity, channel managers may proactively solicit a customized contract to legitimize the transaction with the host partner to gain social acceptance. They should use the contracting process to understand, learn, and make sense of the institutional environments. Alternatively, relational governance helps firms mitigate legitimacy pressures and market ambiguity through information sharing, flexibility, and joint problem-solving. Managers should build relational bonds with the local partners to become insiders to gain both legitimacy and accurate market information, which lead to enhanced firm performance.
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