Institution-Based View and Resource Theory

This assignment examines the interplay between the Institution-Based View (IBV) and Resource-Based Theory (RBT) in shaping firm strategy. It emphasizes the role of institutions, both formal and informal, in influencing strategic decision-making. The paper delves into the analytical logic behind these theories, highlighting how IBV considers institutional constraints while RBT focuses on firm heterogeneity and valuable resources. The discussion also explores the mechanisms underlying these perspectives and their implications for understanding competitive advantage in different contexts.

Running Head: Business communication 1
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Introduction:
International business is considered as those business activities which are conducted at cross
border and include dealing of goods and services between two or more countries. Transactions
related to goods and services include capital, skills, and people for the purpose of international
production of production of physical goods such as finance, banking, etc. at international level.
International business can also be considered as globalization.
In other words, international business involves those firms which engaged in cross border
economic activities, trading transactions, and activity of doing business abroad. Participants of
international business are known as Multi - National Enterprises (MNE), and MNE are those
firms which participates in foreign direct investment by directly investing, managing and
controlling those activities which are value added in other countries.
Evolution and development of activities related to international business are evidenced by two
core theories, and these theories are the Institution - Based Theory (IBT) and the Resource -
Based Theory (RBT). This paper analyzes the role played by IBT and RBT in lieu of MNE and
International business in general evolution. General evolution of MNE and IB involves foreign
investment, offshoring and outsourcing, and foreign entry strategies. Lastly, paper is concluded
with brief conclusion.
Evolution in international business and MNE:
What helps the firms in driven their strategy in case of international business, and what factors
determine the success of the firm at global level? These two questions are considered as most
important questions of the international business (Peng, 2004). It can be said that both the
questions are addressed by two perspectives that are institutional based theory and resource
based theory.

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Role played by Institutional based theory:
Two big paradigms governing the field of international business and MNE, in 1980 industry
based view dominant this field and in 1990 resource-based view of the firm dominant the field.
In recent decades, both the perspectives move like pendulum for the purpose of answering the
questions stated above. Recently, third perspective is introduced in this field and this perspective
is considered as consideration of industry based view and resource based view, and this
perspective is known as institution-based view. IBT includes both the factors that are economic
(institutional economics) and sociological (institutional theory), and the main aim of IBT is to
understanding the why firms differ in context of competitive advantage (Kang & Jiang, 2012).
In other words, this theory determines the rule of games in the society. As stated by North, this
theory is developed for addressing the humanly issue that cause from political, economic and
social factors. These factors impose restrictions on the behavior of business by putting legal,
moral and cultural boundaries, and these boundaries differentiate between the legitimate and
illegitimate activities. From theoretical point of view, it can be said that this theory is considered
as efficient solution to the problem of organization in the competitive framework. Therefore, it
can be said that IBT is the result of combination of both the theories stated above in context of
business strategy. It drives the choices in strategies as a result of the dynamic interaction between
organizations and the formal and informal institutional environment (Garrido, Gomez, Maicas &
Orcos, 2014).
The impact of institution based theory on strategy of international business is pervasive in nature,
and it serves various other functions. Institutions are considered as pervasive in nature because
they shape the behavior of multiple actors such as individuals, firms, industries, and non-
governmental organizations. It can be said that institution reduces the uncertainty level of

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different actors by providing the norms related to behavior of the firm and stated the boundaries
to define the legitimate actions. Actors conduct their business and decide between the formal and
informal factors stated in the framework defined by the institution. Uncertainty in such factors
directly affects the decisions taken by actors, and also stated that inform decisions and actions
are the result of the relevant institutions. Rational approach is provided by the institution for the
purpose of justifying the compliance with the norm. There are three pillars of compliance, and
these three pillars are regulative pillar, normative pillar, and cognitive pillar (Peng, Wang &
Jiang, 2008).
This can be understood through example, as political systems of the nation shows uncertainty in
context of the way in which transactions are affected by the government and the institutional
structure stated by the government (Acemoglu and Johnson 2005). Logic related to political
system which is predominant in nature states that political system which is democratic provides
more certainty and predictability within the society. Therefore, it can be said that degree of
political risk defines the institutional environment in the international business. By applying this
logic to the decision making of MNE, it is clear that political system play important role in cross
border transactions.
As stated above, foreign direct investment (FDI) is considered as most important feature of
evolution of MNE. It must be noted that, institutional structure and governance play major role
in attracting the foreign investments, and this statement is mainly suitable in case of transition
countries.
The strategies used by the firm shows the translation of both formal and informal constraints
with the institutional framework of nation. It must be noted that, formal institution and informal

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institutions are derived from the other sources in the institutional environment of the firm, but
still both the factors contribute similarly while guiding the behavior off the firm. In case formal
constraints are not complete and present then informal constraints can be used to guide the
behavior of the firm.
Generally, it can be said that both formal and informal institutions combine for the purpose of
governing the behavior of the firm. However, when formal constrains are not present then
informal constraints play important role in reducing the uncertainty and guide the mangers in
context of firm’s institutions that are societal activities, cultures, and ethics which are supported
by normative and cognitive pillars.
Strategic behavior is affected by the normative pillar to the extent that strategies framed by the
firm are related to the informal institutions in context of social norms. Strategic behavior is also
affected by cognitive pillars to the extent that valued and shared beliefs are also incorporated in
the decisions of the firm (Mathews 2006). Therefore, it is necessary to maintain the balance
between the formal and informal institutions.
Those firms which share their environment of institution with each another may usually make
similar type of decisions and deal with similar type of institutions. This can be understood
through example, cultural as an informal institution guide the firm in making strategic decision
in the absence of formal institution (Peng & Khoury, 2008).
Role played by resource based theory:
Recent, there are large number of firms from emerging economies have come to define and
dominate new markets, and they enter in the field of global market and become global innovation
leaders. Those firms which were specialized in providing the substitutes which were high quality

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but cheap such as Brazil’s Embraer, those firms which adopted fast second mover strategies such
as Samsung, and those firms which offer outsourcing services such as Wipro are now actively
indulged in the global productivity and innovation frontier. Additionally, there are number of
small and medium sized firms which start their activities in abroad at their own account.
In this era of globalization, there are number of firms which are not able to cope with the
changes occurred in the market competition on the basis of resources and capabilities which are
owned by firm. Therefore, rather than improving their own competencies, firms must
concentrate on keeping long term relations with their business partners for the purpose of
arranging their networks for getting other type of resources (De Man, 2004). Therefore, it can be
said that opening of market and international division of labor gain, and internationalizing the
activities of firm can be considered as important strategy for the firm for the purpose of ensuring
sustainable growth. This process is known as the international process through which MNE
develop its relationship with its partners in the foreign market. In what way firm can develop
these networks in the foreign market and those areas where firms can invest for the purpose of
getting resources is considered as major issue in context of international business. For solving
these issues, RBT was developed and it helps the firms in getting competitive advantage.
From the period of 1990, Resource-based theory (RBT) dominates the market and it considered
as most important theory of strategic management research. As per the argument stated by RBT
differences in performances of firm is because of the firm heterogeneity. Those resources of the
firm which are rare and valuable will help the firm in achieving sustained competitive advantage.
From last few years, various branches with different assumptions and perspectives were
introduced by the RBT. This theory extended the core tenants by stating the perspective for the
purpose of explaining how inter-firm cooperation can help in generating the competitive

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advantage in sustainable manner. This theory stated argument that resources if generating in
accurate way than it can help the firm in creating their competitive advantage as it can expand
the boundaries of the firm and also create inter-firm relations. Therefore, firm can get
competitive advantage not only from those internal resources which are owned by the firm but
also from external resources which are got by the firm through its relational networks (Lavie,
2006).
As stated, internationalization is considered as process through which firm increase its
involvement in international market, and foreign market is considered as that area in which
entrant firm develops the relationship with other partners in foreign networks. This process is
driven by efforts of the firm for the purpose of creating the value through coordinating their
activities. It must be noted that this theory mainly emphasis on the access of resources, market,
information, and technology by the firm. It also allowed the firm to share risk and outsource
value-chain stages. Overall RBT theory in evolution of IB and MNE are:
 It allowed to firms to get specialization in core business of the value chain, division of
labor improves the efficiency, and also provide scale and scope in context of economy.
 Firms in the relational network enjoyed the flexibility provided to them because they do
not have fixed commitments to those activities which are not important for them, and this
flexibility enables the firm to act quicker as compared to rivals.
 Firms can easily cut down the transaction costs through mutual awareness and by trusting
their network members which help them in ensuring long term cooperation.
 It also allowed the firms to access key resources from the environment.

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After considering above facts, it is clear that IBT and RBT play completely different roles in the
IB and MNE, but still coordination between the two is necessary to driven the strategy of the
firm and gaining competitive advantage (Wang, n.d.).
Conclusion:
There are number of scholars considered the fact that IBT in case of emerging economies and in
developed economies also not only focus on industry conditions and firm capabilities, but it also
focus on various other factors. IBT with the combination of industry- and resource-based views
developed formal and informal constraints which directly affected the strategy of the firm. In this
paper, first we seriously consider the importance of institution, after that we worked on analytical
logic. Lastly mechanisms in this context are underlying. On the other hand, Resource-based
theory (RBT) dominates the market and it considered as most important theory of strategic
management research. As per the argument stated by RBT differences in performances of firm is
because of the firm heterogeneity. Those resources of the firm which are rare, valuable, non-
substitutable, and difficult to imitate will help the firm in achieving sustained competitive
advantage.

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References:
Acemoglu, D., and Johnson, S. (2005). ‘Unbundling Institutions’, Journal of Political Economy,
Volume 113, Pp- 949–95.
De Man, A. P. (2004). The Network Economy: Strategy, Structure and Management. Edward
Elgar Publishing, Inc. Northampton, MA.
Garrido, E. Gomez, J. Maicas, J. & Orcos, R. (2014). The institution-based view of strategy:
How to measure it. BRQ Business Research Quarterly, Volume 17(2), Pp 82-101.
Kang, Y. & Jiang, F. (2012). FDI location choice of Chinese multinationals in East and
Southeast Asia: traditional economic factors and institutional perspective, Journal of World
Business, Volume 47 (1), pp. 45-53.
Lavie, D. (2006). The competitive advance of interconnected firms: An extension of the
resource-based view. Academy of Management Review, 31(3), 638-658.
Mathews, J. (2006). ‘Dragon Multinationals: New Players in 21st Century Globalization’, Asia
Pacific Journal of Management, Volume 23 (1), Pp- 5–27.
Peng, M. W. (2004). Outside directors and firm performance during institutional transitions.
Strategic Management Journal, Volume 25(5), PP- 453–471.
Peng, M. Wang, D. & Jiang, Y. (2008). An institution-based view of international business
strategy: a focus on emerging economies. Available at:
http://www.academia.edu/3240077/An_institution-
based_view_of_international_business_strategy_A_focus_on_emerging_economies. Accessed
on 14th November 2017.

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Peng, M. & Khoury, T. (2008). Unbundling the institution based view of International business
strategy. Available at:
https://www.utdallas.edu/~mikepeng/documents/articles/Peng08KhouryOHIBRugman256-
268.pdf. Accessed on 14th November 2017.
Wong, J. A Relational View of Resources-based Theory: The case of Internationalization of Li &
Fung Group. Available at: http://www.hraljournal.com/Page/4%20Jeng-Min%20Wong.pdf.
Accessed on 14th November 2017.