Organizational and industrial response to market liberalization: the interaction of pace, incentive and capacity to change

Organization Studies, Nov-Dec, 2002 by Steven White, Greg Linden

Abstract

This paper draws on prior research on organizational change to link the pace of macroeconomic reforms in a transition economy to the ability of domestic firms and industries to face new foreign competition. We argue that if the pace of economic reforms exceeds the pace at which organizations can adopt appropriate strategies, those organizations will not be able to survive, even if they have the potential to do so otherwise. A comparison of the Polish and Chinese television manufacturing industries grounds our model that relates the pace of adaptation to environmental change, managerial incentives and organizational capacity to the likelihood that incumbent firms will be able to survive in newly liberalized markets. In Poland, domestic television producers were decimated by foreign entrants after the government implemented 'big-bang' reform measures. China's 'go-slow' approach to reform, in contrast, allowed managers in some - but not all - state-owned enterprises to make and implement strategic changes that e nabled them to compete successfully with foreign firms. This interaction between the speed of environmental shifts and the internal pace of organizational change suggests important implications for research and policy making in transition economies and other contexts in which industries are being opened to new competitive pressures.

Descriptors: market liberalization, organizational change, comparative research, Poland, China, television industry

Introduction

This paper proposes an empirically grounded and parsimonious model to explain variation in outcomes among both national industries and individual organizations following the opening of an economy to foreign competition. Traditionally, researchers have focused on one or other level of analysis, and their resulting models have provided only partial insight into the original empirical phenomenon -- response to market liberalization -- that motivated them. Research at one extreme takes a macroeconomic policy perspective of the transition process, trying to understand how different policy environments affect outcomes of some aggregate group defined, for example, by nation, sector, industry or ownership type (e.g. Krishna and Mitra 1998, on India; Komai 1990, on Hungary; Nee 1992, on China). This approach typically assumes that the disappearance of any incumbent firms is due to their lower efficiency. Finns and managers are discussed only in the abstract and as reacting similarly to the same macro-level environment and institutional forces. In contrast, research at the organization level takes a managerial perspective to study the variation in organizational response to a new business environment created by reform policies (e.g. Peng and Heath 1996; Tan and Litschert 1994; Guthrie 1997; White and Liu 1998, 2001; Estrin et al. 1995).

Research from both the policy and managerial perspectives also tends to focus on a single country or related region (e.g. Calm and Aghion 1996), and only rarely across very different countries and regions (for an exception, see Woo et al. 1997). Researchers are absorbed in the idiosyncrasies of a particular national context, or, in attempting to control for the national policy environment while investigating variation in organization-level behaviour and performance within that environment, they focus on a national context by design. The tendency to focus on a single country is understandable, and researchers often cite North (1990) or, for Asia, Whitley (1992) when they argue that policy and other aspects of the national environment represent fundamental sources of important contextual peculiarities and causal relationships. While the resulting 'thick' explanations may be thorough, their lessons are, however, often difficult to generalize to other national or industrial contexts. As a result, research into si milar questions in different national contexts progresses in parallel, but also in isolation, from work in other countries or regions. This obviously inhibits comparative studies as well as cross-border learning by managers and policy makers.

We argue that it is possible to account simultaneously for variation in outcomes at the national, industrial and organizational levels of analysis by integrating the policy and managerial perspectives into a single model. Indeed, such a model is necessary to explain variation observed in the response of both industries and organizations to new foreign competition. In the following section, we draw on the vast and diverse literature addressing organizational change to help us develop a general model that explains observed differences in the response to policy change among industries and organizations. The model is illustrated by carrying out a detailed comparison of the television industries and major producers in Poland and China and offers a framework for explaining the dramatic variation, not only between the Polish and Chinese industries, but within the Chinese industry as well. The model also leads to generalizable policy and managerial implications.