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Investments during institutional transitions: Driven by problems or opportunities?

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Abstract

This study empirically examines the firm-level motivational mechanisms that drive firms to pursue investment avenues during periods of institutional transitions. Grounding this research at the intersection of organizational adaptation driven by institutional transitions and the search processes stemming from performance problems and growth opportunities, I propose a negative (positive) relationship between the intensity of performance below aspirations (growth opportunities) and strategic investments made by firms. In addition, I propose a moderating influence of business group affiliation on the relationships mentioned above. I test and find support for the hypothesized predictions on an unbalanced panel dataset comprising 8354 firm-year observations belonging to 1695 listed manufacturing firms from the emerging market of India during the period 1995 to 2010. This study bridges the macro–micro link between institutional transitions and firm behavior by theorizing the effect of organizational search mechanisms and identifies institutional transitions as a boundary condition that mutes problemistic search leading to investments. This study has important implications for the literature on institutional transitions and a behavioral theory of the firm.

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Notes

  1. Theoretically, the behavioral theory predicts a clear linkage between performance below aspirations and organizational change. However, the same is not the case for performance above aspirations. Cyert and March (1963) surmise that performance above aspirations encourages firms to persist with existing course of action and resist making changes, but “success breeds slack” (Cyert & March, 1963: pp. 189) which is consistent with the logic of slack driven search culminating in organizational changes (Xu et al., 2019). Owing to this theoretical ambiguity, this study does not focus on ‘performance above aspirations’ and its effect on strategic investments.

  2. Subsequently several improvements were undertaken to strengthen the informational, legal and judiciary infrastructure to ensure a strong capital market, but these changes occurred over a period of time.

  3. Manufacturing firms are those that operate in the National Industry Classification codes (2008 classification) ranging from 101 to 329XX. The National Industry Classification codes used to classify industries in the Indian context are similar to Standard Industrial Classification codes that are used to classify industries globally.

  4. I checked the equality of means of the main dependent variable in the sample and population to check for bias in sample due to data reduction. The independent t-test does not reject the null hypothesis (t = -1.22, p > 0.10) confirming that the distribution of the dependent variable in the sample mirrors the population.

  5. Although the period considered in this study is marked by inefficient and under-developed capital markets, subjecting the measure of market-to-book ratio to some noise, it would be applicable for the entire sample and hence I don’t expect it to bias our inferences. I thank an anonymous reviewer for raising this relevant point.

  6. Wooldridge test (F = 17.8; p < 0.01) implemented using the xtserial routine in Stata suggests presence of serial correlations in our data, while the modified Wald test (chi2 = 4.1 + e6; p < 0.01) implemented using xttest3 routine suggests presence of groupwise wise heteroskedasticity.

  7. Similar to Greve (2003a), I increased the value of α in steps of 0.1 and chose the weights which gave us the highest model “log-likelihood”. This procedure yielded a value of 0.3 for α.

  8. I sincerely thank an anonymous reviewer for this suggestion.

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    Lakshmi Goyal

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Goyal, L. Investments during institutional transitions: Driven by problems or opportunities?. Asia Pac J Manag 40, 1733–1768 (2023). https://doi.org/10.1007/s10490-022-09838-5

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