Conform or Rebel: When Does Keeping to the Rules Enhance Firm Performance?

Canadian Journal of Administrative Sciences, Jun 2009 by Eapen, Alex, Krishnan, Rekha

Abstract

This paper examines whether there are economic rewards to mimicking strategic actions of other firms. The strategic behaviour we study is the formation of technology collaborations with MNEs by Indian firms. We argue that conforming to the behaviour of other firms has differential performance effects across different classes of firms and suggest that the benefits of conformity accrue more to small than large firms. To test this, we measured each Indian firm's conformity to the average tendency of other similar firms to collaborate with an MNE and then regressed its performance on conformity. Results were consistent with our expectations that small firms gain more from conformity than do their larger counterparts. Copyright © 2009 ASAC. Published by John Wiley & Sons, Ltd.

Keywords: institutional theory, mimetic behaviour, collaboration, emerging markets, performance

JEL classification: M16

Résumé

Cet article examine les avantages économiques potentiels liés à l'imitation des actions stratégiques des autres entreprises. Le comportement stratégique étudié est la formation de la collaboration technologique entre des entreprises indiennes et des multinationales. Nous soutenons la thèse que l'imitation du comportement des autres entreprises a des effets différentiels au niveau de la performance des différentes classes d'entreprises, et que les petites entreprises profitent plus de l'imitation que les grandes. Pour tester cette thèse, nous mesurons d'abord le taux de conformité de chaque firme indienne par rapport à la tendance moyenne des firmes similaires à collaborer avec des multinationales, puis nous régressons sa performance de conformité. Nos résultats confirment notre hypothèse, notamment que les petites entreprises profitent plus de l'imitation que les grandes. Copyright © 2009 ASAC. Published by John Wiley & Sons, Ltd.

Mots-clés : théorie institutionnelle, comportement mimétique, collaboration, marchés émergeants, performance

Institutional theory serves as an alternative to economic efficiency-based explanations of firm behaviour. With its sociological provenance, the theory argues mat organizations conform to norms and trends in their organizational field in order to gain social legitimacy. While initial work in this direction has focused on how innova- tion in organizational structures and forms diffuse across populations (Meyer & Rowan, 1977), recent research has also confirmed mimetic behaviour in strategic choices (Barreto & Baden-Fuller, 2006; Fligstein, 1991; Haun- schild, 1993; Haveman, 1993; Henisz & Delios, 2001). Scholars and practitioners now widely acknowledge that when faced with an uncertain decision (Milliken, 1987), firms search for paths beyond their organizational boundaries and tend to pursue options adopted by other organizations engaging in similar pursuits mat they distinguish as being more legitimate or successful (DiMaggio & Powell, 1983, p. 152).

In this paper, we examine the economic consequences of such mimetic behaviour. Extant dieory and evidence on the economic performance consequences of conformity is both scant and equivocal. Darwinian evolutionary economics and some arguments in institutional dieory suggest mat conformity increases bottom-line performance (Anderson, 1988; Chen & Hambrick, 1995; Deephouse, 1999; Pfeffer, 1972). On the other hand, however, certain other arguments and findings in institutional theory suggest that the returns to conformity are more social man economic, mat is, conformity increases social legitimacy of firms but not necessarily economic performance (Barreto & Baden-Fuller, 2006; Staw & Epstein, 2000; Westphal, Gulati, & Shortell, 1997). One possible reason for these diverging results is that the economic costs of nonconformity accrue unevenly to different kinds of firms. We propose that the costs of nonconformity are amplified for small radier than for large firms and thus me effect of conformity on performance is moderated by the size of the firm. This is in line with the broader argument that conforming to general behaviour is more useful only under certain circumstances (Anderson, 1988; Deephouse, 1999).

The strategic behaviour considered in the current study is technology collaboration by Indian firms with foreign multinational enterprises (MNEs). Since India's recent liberalization, Indian firms have increasingly entered into technology collaboration with foreign MNEs with a view to boosting their technology repertoire and gaining access to newer, sophisticated technologies. From the MNE's point of view, such contractual arrangements for technology transfer to domestic firms (e.g., licensing agreements) typically have lower set-up costs and serve as alternatives to establishing full-fledged subsidiaries. In other cases, they are a first step in the process towards setting up subsidiaries. We examined this behaviour of technology contracting between foreign and Indian firms to understand the extent to which Indian firms conform to the average tendency of similar firms to contract for technology with an MNE and how ftis conformity influences the Indian firm's performance.