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Institutional voids exist in emerging economies because they do not have the same safeguards that are customary in developed markets (Alon and Rottig, 2013). "The absence of specialized intermediaries, regulatory systems and contract enforcing mechanisms" (Khanna et al. , 2005, p. 63) creates a situation where the formal "rules of the game" that normally enable and facilitate market activities remain absent or weak (Khanna and Palepu, 2010). Given this issue, a MNE often establishes an international joint venture (IJV) to provide a wider range of choices when facing host-market uncertainty in order to protect its legitimacy (Li and Li, 2010).
Building on institutional theory, previous research has focussed on the challenges faced by MNEs in emerging markets due to partner opportunism resulting from MNE's low knowledge resources or partner embeddedness in local institutions (Child and Yan, 2003) and incongruent goals between partners (Chen et al. , 2009). However, there has been little research into how the MNE's legitimacy may be damaged through partner misconduct or lapses in the IJV's supply chain (Khanna et al. , 2005; Meyer et al. , 2009). While institutional theory has played an important role in explaining how MNEs interact with their external environment, this approach has also privileged regulatory and performance indicators (Wu and Chen, 2014). Rather, as Trevino et al. (2008) argue, we need a new institutional theory that also includes cultural-cognitive pillars that more fully explain how environments shape a MNE's operations and performance.
We seek to fill this gap by examining a specific institutional void i.e. the absence of national standards for quality control in China, using the milk powder scandal involving the world's third largest global dairy MNE, Fonterra, and its IJV partner in China, Sanlu Group Ltd. Using secondary data, the purpose of this qualitative case study is to illustratively explore the causes and impacts of an IJV scandal on MNE legitimacy in an emerging market characterized by weak regulatory systems that are also relatively unstable, inconsistent, and arbitrarily enforced (Gupta and Wang, 2004). The three research objectives are to first, identify the institutional voids that provided the context for the scandal; second, examine the impacts on the MNEs legitimacy; and third, discuss the interplay between legitimacy and institutional voids through a longitudinal approach.
Our...