Institutional quality, firm performance and business groups: evidence from emerging economies

Abstract

Firms face numerous challenges while doing their business operations and one of the biggest challenges is to deal with the conditions of the institutional environment. In this study I analyse how the quality of the institutional environment influences firm performance in emerging economies. More exactly, this study develops a comprehensive conceptual model of six hypothesized relationships between the quality of the three institutional dimensions proposed by Scott (1995) (regulatory, normative and cognitive) and firm performance. Besides, it also examines the moderating effect of group affiliation on firm performance when institutional quality is low. The model is designed through a linear regression using a sample of 5.166 firms from 19 emerging economies to test the theoretical hypotheses. The findings indicate that lower regulatory and normative quality will lead to lower firm performance. The results also show that the moderating effect of group affiliation has a positive impact on firm performance only when regulatory quality of the institutional environment is low. Considering the effect of institutions and group affiliation on performance, this study contributes to our understanding of how firms from countries with lower institutional quality, that are more likely to face difficulties, can prepare themselves by building a theory that is context-specific.