8.

Intl Ent, SMEs & Born Globals

A Transaction Cost Approach to International Entrepreneurship
INTRODUCTION
Entrepreneurship is a global phenomenon, and entrepreneurial ventures are shaped by the national
institutional contexts within which they are embedded (Sine & David, 2003). The institutional
environment can define firms wealth-maximizing opportunities, and in doing so, enable firms ability to
successfully exploit the opportunity. However, not all institutional contexts are equivalent, particularly
with regard to the inherent transaction costs (Williamson, 1985), and while scholars have examined the
importance of national differences in culture and social structure to entrepreneurial activity (e.g. Tiessen,
1997; Klyver, Hindle & Meyer, 2008), less attention has been paid to how entrepreneurs deal with the
variance in the costs of transacting in different institutional contexts.
While efficient factor and product markets are implicitly assumed in free markets, there are
places in the institutional framework where such enabling institutions are poorly functioning, weak or
even nonexistent. These have been described as institutional voids, imperfections or failures in the market
mechanisms that bring buyers and sellers together (Khanna & Palepu, 1997, 2000; Leff, 1978; Mair &
Marti, 2009). Both institutions and institutional voids affect the functioning of the market mechanism, by
increasing or decreasing the transaction costs attached to firm activity (North, 1990), which can directly
influence success or failure of entrepreneurial ventures.
Since entrepreneurial firms tend to be smaller, less cutting edge and possess less sophisticated
and slack resources than their established counterparts (Baker & Nelson, 2005), they may not have access
to the same coping mechanisms for dealing with voids as more established firms, such as business groups
(Khanna & Palepu, 2000) and geographical clustering (Lundan, 2012). Institutional environments and the
voids therein may therefore impact de novo firms greatly (Henrekson, 2007) more so than existing MNEs.
Further, the effects of the uncertainty due to differences in culture, language, politics, and environment
between the home country and potential new markets may be especially pertinent when an entrepreneurial
firm moves from one institutional environment to another (Zacharakis, 1997).

8. Intl Ent, SMEs & Born Globals

With this in mind, we seek to answer the following question: What can entrepreneurs do to
overcome institutional contexts rendered ineffective by institutional voids? While various scholars have
examined different types of entrepreneurial action within institutional environments in isolation, thus far
no one has taken a holistic view of all of the actions entrepreneurs can take (Mair & Marti, 2009,
Battilana et al., 2010). Building on McMullen and Shephards (2006) framework, in this conceptual paper
we describe four potential responses entrepreneurs have when facing ineffective institutions, depending
on their motivation and knowledge: (1) institutional entrepreneurship (Greenwood & Suddaby, 2006), (2)
institutional bricolage (Mair & Marti, 2009), (3) institutional avoidance (i.e. not participating in that
institutional context), or (4) institutional bridging. We describe institutional bridging as entrepreneurs
engaging in the act of strategically combining multiple institutional contexts to decrease their overall cost
of transacting.
Specifically, we focus on how entrepreneurs embedded in contexts with ineffective institutions
can use institutional bridging to connect with contexts with more effective institutions in order to reduce
transaction costs. To explore this concept, we combine literature on entrepreneurship and institutional
economics with transaction cost economics (TCE). We describe the responses to ineffective institutions
based on the entrepreneurs motivation and knowledge as indicators of their willingness to bear perceived
uncertainty (McMullen & Shepherd, 2006). We argue that entrepreneurs willingness to bear
uncertaintythat is, their motivationenables them to overcome the increased uncertainty stemming
from acting within multiple institutional environments. There is an implicit assumption in the literature
that entering into new, unknown contexts will increase transaction costs due to uncertainty. In this paper,
we provide a transaction cost model explaining the potential advantages of institutional bridging despite
this uncertainty. By using a transaction cost model, we find that while additional environments may
increase transaction costs due to the uncertainty of a new, unknown context, institutional bridging may
allow entrepreneurs to decrease the cost of transacting as a whole.
We begin with a review of the literature.
ENTREPRENEURSHIP AND THE INSTITUTIONAL ENVIRONMENT

8. Intl Ent, SMEs & Born Globals

In this research we draw on three prominent literatures: TCE, institutional economics, and international
new ventures (INVs). These vast literatures cover many topics at great depth and have been integrated
numerous times. However, integrating all three of these literatures provides additional insights into how
entrepreneurs respond to institutional voids. This integration of perspectives allows us to address three
gaps in existing literature.
First, our research addresses the issue of a lack of a developing economy perspective in existing
literature. Much of existing research focuses on firms from developed economies. For example, the TCE
literature often focuses on entry mode decisions made by MNEs from developed countries (Brouthers,
2013). Literature on INVs began by studying firms from a developed country (Knight & Cavusgil, 2004),
but even the expansion of that literature has not appropriately addressed the challenges of INVs from
developing countries (Cavusgil & Knight, 2015). Additionally, the INV literature has typically taken a
capability perspective on firms expansion (Knight & Cavusgil, 2004; 2015). By utilizing a TCE
perspective, we offer new insight into the possible motives of firms that choose to internationalize early.
Finally, research on globalization has investigated the financial motivations of outsourcing, but has not
yet offered a theoretical frame to explain how each aspect of a firm may be optimized based on
transaction costs and institutions. Moreover, this theory development is particularly important to new
firms who are often forced to bootstrap (Bhide, 1992) or bricolage (Baker & Nelson, 2005) simply to
continue operations.
We address these gaps in theory by bringing each of these theoretical frames together to offer a
unified view of how entrepreneurs, particularly those in ineffective institutional contexts, deal with
institutional voids. Each of these streams of literature offers some insight, but fail to offer a complete
picture. In particular, these literatures overlook the ability of entrepreneurs to bridge two institutional
contexts in order to lower overall transaction costs. Therefore, we summarize these streams briefly to lay
the groundwork for a description of how entrepreneurs deal with institutional voids, and in particular how
entrepreneurs use institutional bridging to overcome uncertainty and decrease transaction costs. We begin
with a brief explanation of the role the institutional environment plays with regards to entrepreneurship.

8. Intl Ent, SMEs & Born Globals

The institutional environment. The institutional environment provides the structure for exchange
that determines the costs associated with transacting for firms. According to institutional economics (IE),
institutions are the rules of the game operating in a given environment that influence firm behavior by
raising or lowering transaction and transformation costs in that environment (North, 1990). Such
institutions include the set of laws and regulations characterizing the firms operating environment
(LaPorta, Lopez-de-Silanes, Shleifer, & Vishny, 1998; Makhija & Stewart, 2002; Reed, 2001), the lack of
such laws and regulations, or institutional voids (Khanna & Palepu, 2000), the cultural and social
norms operating within the environment (North, 1990; Peng, Wang & Jiang, 2008), as well as the role
and nature of governmental involvement in the economy (Henisz & Zelner, 2005). Along with transaction
costs, institutions play a critical role in determining the firms costs of transforming inputs into outputs.
For example, efficient factor and product markets are implicitly assumed in free markets, but as North
(1990) points out, their existence entails a complex set of institutions that encourage factor mobility, the
acquisition of skills, uninterrupted production, rapid and low-cost transmission of information, and the
invention and innovation of new technologies (1990: 64). In other words, what underlie market
efficiency are institutions that facilitate perfect information flows, facility of measurement and
enforcement. However, the complex set of institutions necessary for bringing about all of these conditions
at the same time are unlikely to exist for most countries.
Institutional voids. Institutional voids can occur in several different types of markets, such as
product markets, labor markets, capital markets, and cross-border markets for technology (Khanna &
Palepu, 2000). These voids affect the functioning of the market mechanism by increasing or decreasing
the uncertainty related to market activities, thus increasing or decreasing the uncertainty related to these
activities (North, 1990). In order to address the change in associated transaction costs, entrepreneurs may
need to change their strategic choices, which can directly influence success or failure of entrepreneurial
ventures.
Institutional voids are typically associated with emerging economies, where necessary resources
and technology may be less sophisticated or absent (Bartlett & Ghoshal, 2000), judiciary and contract

8. Intl Ent, SMEs & Born Globals

enforcement mechanisms may be inefficient and regulations burdensome (Cuervo-Cazurra & Genc,
2008), and political instability or government policy discontinuities may exist (Ghemawat & Khanna,
1998; Khanna & Palepu, 1997). Developed economies may also experience institutional voids, such as
seen in the U.S. subprime lending market (Khanna & Palepu, 2000). Well-established institutions coexisting with institutional voids in the same context results in a varied institutional mosaic (Makhija &
Stewart, 2002), that firmsincluding entrepreneurial firmsmust strategically navigate within and
around.
Increasing focus has been directed at ineffective institutional contexts, primarily in the form of
emerging economies, from a variety of research perspectives including institutional economics,
international business and entrepreneurship. For example, institutional economics scholars have studied
how formal institutions may be lacking in ineffective institutional contexts (North, 1990), how informal
institutions can compensate for that deficit (Peng & Heath, 1996) or how institutional voids may prove
difficult to overcome (Khanna & Palepu, 2000). International business scholars have studied the
uncertainty of the ineffective institutional environment for decades, focusing on how large multinational
corporations (MNCs) navigate this uncertainty in order to access new markets or take advantage of less
expensive resources in these ineffective institutional contexts through political bargaining efforts (see i.e.
Vernon, 1971; Ramamurti, 2001), alliances with local partners (Barkema, Shenkar, Vermeulen & Bell,
1997; Beamish & Banks, 1986; Buckley & Casson, 1996; Johanson & Vahlne, 1977; Madhok, 1997), or
brownfields (Meyer & Estrin, 2001), in order to overcome liability of foreignness (Zaheer, 1995).
Research has shown how MNEs may use business groups (Khanna & Palepu, 2000a; 2000b), alliances
with foreign firms (Siegel, 2004), or agreements with the state (Musacchio & Lazzarini, 2014) and
nongovernmental actors (Doh, Lawton & Rajwani, 2012) to bridge institutional voids. Finally,
entrepreneurship research has also addressed some of the concerns of ineffective institutional contexts, by
examining bottom of the pyramid markets (Kistruck et al. 2013; Bruton, 2010; London, et al., 2010),
micro-finance issues (Mair & Marti, 2009; Roodman, 2012), and institutional entrepreneurship (Battilana
et al. 2010). Each of these streams of research acknowledges the difficulties that face firms operating at

8. Intl Ent, SMEs & Born Globals

some level in ineffective institutional contexts, typically attributed to issues surrounding ineffective
institutions (North, 1990; Mair & Marti, 2009).
However, despite the acknowledgement by scholars that the institutional environment is critical
for entrepreneurial action (Philips & Tracey, 2007; Davidsson, 1995; Klyver et al., 2008; Sobel, 2008;
Tiessen, 1997), the ways in which institutional voids affect the process by which entrepreneurial
opportunities are realized has not yet been considered. In particular, the actions of entrepreneurial firms
operating in ineffective institutional contexts and how they deal with the uncertainty and increased
transaction costs require a deeper understanding.
International entrepreneurship. Research on international entrepreneurship is typically
characterized as the investigation of how firms internationalize their operations early in their existence
(Cavusgil & Knight, 2015). This phenomenon was popularized by the work of Oviatt and McDougall
(McDougall & Oviatt, 2000; McDougall, Shane, & Oviatt, 1994; Oviatt & McDougall, 1994, 1995, 2005)
as an investigation into firms that did not follow the received theory on international expansion often
called the Uppsala model (Johanson and Vahlne, 1977). While the Uppsala model argues for a gradual
expansion into proximal nations, research on international new ventures (INVs) argues that some firms
opt to expand early into international contexts.
The majority of work on INVs, or born global firms, has focused on three areas: seeking new
opportunities abroad, the characteristics of entrepreneurs, and entrepreneurial networks. Fan and Phan
(2007) argued for early internalization based on the size of the domestic market. That is, INVs may exist
partly because their home market is small relative to foreign opportunities. Other research in this area
emphasized the role of resources and dynamic capabilities in the pursuit of these foreign opportunities
(Mathews & Zander, 2007). Research on entrepreneur characteristics has emphasized international
orientation (Zhou, 2007) as well as risk perception and tolerance for ambiguity (Acedo & Jones, 2007).
Other work has also found a relationship between the international experience of the entrepreneur and
early internationalization (Naud & Rossouw, 2010). Finally, a substantial amount of research has been
dedicated to the study of networks in relation to INVs. Networks provide access to a variety of resources

8. Intl Ent, SMEs & Born Globals

including financing, distribution, referrals, and other resource development (Coviello, 2006; Coviello &
Cox, 2006). Moreover, networks may offset the resource scarcity faced by most new firms
(Weerawardena & Mort, 2006). However, these findings are based almost entirely on studies done with
respect to more developed economies.
Entrepreneurial ventures in less developed and transitional economies have received less attention
for a number of reasons. However, the work that has been done calls into question the findings regarding
INVs more broadly. A recent review (Kazlauskaite, Autio, Sarapovas, Abramavicius, & Gelbuda, 2015)
has questioned some of the accepted findings above. Regarding the domestic market, emerging-economy
INVs may seek foreign market entry due to the difficulties in domestic markets arising from barriers to
entry (Nowinski & Rialp, 2013; Naud & Rossouw, 2010). Further, Kazlauskaite et al. (2015) argue that
the quality of infrastructure may affect INV internationalization, but does not directly inhibit it. With
respect to international experience, Liu, Xiao, and Huang (2008) found that international experience was
not a necessary condition for foreign market entry aligning with other emerging-economy work
(Nowinski & Rialp, 2013). Finally, Kazlauskaite et al. (2015) argues that domestic networks may be more
important to emerging-economy INVs as a provider of resources than networks abroad.
Issues such as resource scarcity and the use of networks to offset this scarcity are particularly true
of entrepreneurial ventures that operate in the presence of institutional voids. Institutional contexts
containing voids may include poorly developed legal environments, weak formal institutional constraints
such as laws and regulations, thin capital and skilled labor markets, numerous market failures, and few
local firms can match international standards in technology and management (Khanna & Palepu, 2000;
Meyer & Estrin, 2001; Peng & Luo, 2000). All of these aspects increase the uncertainty present within the
institutional environment.
Taken together, the existing literature on INVs suggests there is much work to be done
particularly when it comes to entrepreneurial activity in less developed institutional contexts. Specifically,
it is important to acknowledge the institutional factors that play an increasingly important role in less
developed economies (Kazlauskaite et al., 2015).

8. Intl Ent, SMEs & Born Globals

Internalizing transactions across institutional contexts. Research on internalization of
transactions realizes the increased costs of transacting across institutional contexts (Buckley & Casson,
2007). This stream of research argues that the entrepreneurial firms boundaries are dependent on where
the costs of transacting internally equal the costs of transacting externally (Buckley & Casson, 2009).
This transaction cost economics (TCE) view of internationalization calls into question some of the
research on INVs. Specifically, internalization theory posits that hierarchical control of international
operations may be advantageous despite the liabilities of newness and smallness that entrepreneurial
ventures face (Li, Qian, & Qian, 2015).
Transaction cost economics (TCE) has several implications for firm decisions, but has been used
extensively to discuss foreign entry mode (Zhao, Luo, & Suh, 2004). TCE is predicated on the
assumptions of bounded rationality and the potential for opportunism (Williamson, 1975, 1985). There
are three key dimensions to transactions: asset specificity, frequency and uncertainty. In this paper, we
focus more on uncertainty, although the model offers the potential to incorporate the other dimensions.
Both internal and external uncertainty, stemming from information asymmetry, factor into decisions
regarding multiple institutional contexts (Milliken, 1987; Anderson & Gatignon, 1986). External
uncertainty represents the inability of a firm to predict future events, whereas internal uncertainty
represents the inability of a firm to assess its agents performance stemming from a lack of knowledge of
foreign markets.
Uncertainty. Uncertainty is a central concept to entrepreneurship research (McMullen &
Shepherd, 2006). While there have multiple characterizations of uncertainty stemming back to Knight
(1921) through recent work (Miller, 2007), McMullen & Shepherd (2006) draw the most direct link
between entrepreneurs, uncertainty, and action. Specifically, they describe how uncertainty in
entrepreneurship is ambiguous as it could describe two concepts: the willingness to bear uncertainty and
the perception of uncertainty. The aspects of the entrepreneur that drive action are the entrepreneurs
knowledge and motivation. We use these attributes to explain the possible responses entrepreneurs take
when faced with ineffective institutions.

8. Intl Ent, SMEs & Born Globals

Entrepreneurial action in the face of ineffective institutions. The uncertainty involved in TCE
maps readily onto the attributes of entrepreneurs facing uncertainty. In particular, external uncertainty
relates to perceived uncertainty as described by Shepherd & McMullen (2006). The entrepreneurs
motivation determines their response to external uncertainty. Internal uncertainty relates to the
willingness to bear uncertainty as described by Shepherd & McMullen (2006). The entrepreneurs
knowledge determines their response to internal uncertainty. Both these types of uncertainty arise as
entrepreneurs attempt to pursue opportunities in multiple contexts where at least one context is an
ineffective institutional context. Entrepreneurs may be more or less motivated in their response to external
uncertainty and they may be more or less knowledgeable when it comes to their internal uncertainty.
Cavusgil and Knight (2014) suggest that a combination of existing perspectives and theoretical
frameworks may be the best way forward. In the next section, we take a holistic view of all of the actions
entrepreneurs can take (Mair & Marti, 2009, Battilana et al., 2010) and introduce our theoretical model
describing four possible actions entrepreneurs may take in the face of ineffective institutions.
THEORETICAL MODEL
When faced with ineffective institutions, entrepreneurs have four potential responses: (1)
institutional entrepreneurship, (2) institutional bricolage, (3) institutional avoidance (4) institutional
bridging. We display these four options in figure 1 and go into more detail on each below.
[Insert Figure 1 about here]
Institutional Entrepreneurship. When institutional voids or disconnects exist but entrepreneurs
both know their context well and are highly motivated to enter that institutional environment in order to
exploit their opportunity, enough to make changes to the environment itself, institutional entrepreneurship
can result. Institutional entrepreneurs are entrepreneurs that serve as agents of legitimacy who mobilize
resources to support the creation or transformation of institutions that they deem appropriate and aligned
with their interests (Pacheco et al. 2010; Battilana et al. 2009; Greenwood & Suddaby, 2006). Institutional
entrepreneurs are highly motivated to modify the existing institutional context because they are typically
large multinational organizations with a significant financial stake (Zacharakis, 1997) or they represent

8. Intl Ent, SMEs & Born Globals

large groups of individuals looking to address a pressing need (Maguire, Hardy, & Lawrence, 2004). By
exploiting cues and repertoires, entrepreneurs can enhance the likelihood of successful adoption (Dacin,
Goodstein & Scott, 2002).
Institutional Bricolage. When institutional voids or disconnects exist and entrepreneurs know
their context well but are not motivated to make changes to that institutional environment in order to
exploit their opportunity, institutional bricolage can result. Institutional bricolage occurs when individuals
with deep knowledge of their institutional context act as bricoleurs by making do with the available
existing institutions (Mair & Marti, 2009). Some entrepreneurial firms embedded in less effective
institutional contexts may use their existing connections within business groups to fill some subset of
institutional voids in imperfect markets (Dorado, 2013; Khanna & Palepu, 2000). Business groups may
also provide preferential access to capital, alleviate failures in product, labor and cross-border tech
markets (Aoki 1990; Bergloff & Perotti 1994; Caves & Uekusa 1976; Chang & Choi 1988). In these
cases institutions are not changed; instead entrepreneurs cobble together a solution to overcome
ineffective institutions by combining existing solutions in new ways.
Institutional Avoidance. If entrepreneurs lack both the motivation to enter and the knowledge
regarding a new institutional environment, they may choose to avoid interacting with a new institutional
context all together. This option is typically not discussed in the literature, involving as it does the nonaction of entrepreneurs, though there has been some mention of firms eschewing institutional pressures
through avoidance tactics (Oliver, 1991). In general this is a non-event however and, thus, not relevant to
the primary focus of this paper.
Institutional Bridging. Finally, when institutional voids or disconnects exist and entrepreneurs
are highly motivated to enter a new institutional environment but are unfamiliar with the new context and
may need the help of another agent in order to exploit their opportunity, institutional bridging can result.
We refer to this concept as institutional bridging, where an entrepreneur links an environment with
ineffective institutions to an environment with more effective institutions, in order to lower transaction
costs in pursuit of entrepreneurial opportunity. TCE has typically examined transaction costs across

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institutions as driving an entry mode decision (Zhao, Luo, & Suh, 2004) taking the perspective of a firm
from a developed (i.e. effective) institutional context. Prior research has examined how entrepreneurs, in
particular, address multiple institutional contexts as an entry mode choice (Oviatt & McDougall, 2004;
Zacharakis, 1997). These firms may look to enter other effective or ineffective contexts, but the goal is
minimizing transaction costs. Often the transaction costs stem from the need to acquire new knowledge,
relationships, or legitimacy in the foreign context (Makhija & Stewart, 2002). The decision to enter via
joint venture, alliances, or wholly-owned subsidiaries aims to minimize the cost of transacting from both
asset specificity and uncertainty. In this research, we focus on firms that must operate in an ineffective
context and primarily examine the effects stemming from uncertainty.
Any institutional context has some degree of uncertainty (North, 1990, Williamson, 1985). In
established TCE research, uncertainty has often been approximated as political risk, which may be low
but never absent. If we assume that transaction costs are additive, then additional institutional contexts
would generate additional transaction costs. However, the assumption of additivity implies that
transactions would need to be duplicated. If transactions were not duplicated, but were instead relocated,
then transaction costs may decrease through the inclusion of an additional institutional context.
We examine the three possible scenarios below, to see how additive institutional contexts affect
the transaction costs associated with that firm. We begin with a firm located solely in an ineffective
institutional context.

=
=0

where
TCIIC represents the total transaction costs for a firm in an ineffective institutional context
a represents the individual transaction costs associated with each transaction in the effective
institutional context

A firm that was located solely in an effective institutional context would have a similar structure.

11

8. Intl Ent, SMEs & Born Globals

=
=0

where
TCEIC represents the total transaction costs for a firm in an effective institutional context
b represents the individual transaction costs associated with each transaction in the effective
institutional context

If a firm begins to operate in multiple institutional contexts, then total transaction costs can be represented
in the following way:

= + +
=0

=0

=0

where
a represents the transaction costs associated with each transaction in the ineffective
institutional context
b represents the transaction costs associated with each transaction in the second
institutional context (i.e. effective institutional context)
c represents the transaction costs associated with each transaction that spans both
contexts
,
,
,
++
Ultimately, if TC > TC then expansion to a second context is the logical decision based on TCE.
By including the second context, firms are able to reduce overall transaction costs by appropriately
distributing the firms transactions. Firms can reduce transactions by relocating them to another context.
If the reduction in costs of these relocated transactions exceeds the increased costs of managing multiple
institutional contexts, then inclusion is justified.
Consider a simple example. In Scenario A, a firm operating in an ineffective institutional context
has transaction costs that total 100. While that same firm, if it were able to operate in an effective
institutional context, would have transaction costs of 20. If we assume the firm must maintain some
operations in the ineffective institutional context, then the question becomes are there gains to be made by
relocating some of its transaction costs? If the firm is able to move half of its transactions to the effective
institutional context it would save 50 in the ineffective institutional context by spending 10 in the

12

8. Intl Ent, SMEs & Born Globals

effective institutional context. If we assume that the additional transaction costs from managing across
contexts are 30, then the firm would reap a net gain of 20 by relocating some transactions to the other
institutional context.
Alternatively, if the cost of transacting in the effective institutional context is 60, as in Scenario
B, the firm would not reap any net benefit from relocating a portion of its transactions. Furthermore, as
Scenario C demonstrates, if the additional costs of managing the organization across institutions are
greater than the original scenario, the firm would not reap any net benefit from relocating a portion of its
transactions. These scenarios lead to our proposition, summarized in figure 2.
[Insert Figure 2 about here]
DISCUSSION AND IMPLICATONS
In this paper we attempt a deeper understanding of how entrepreneurial firms navigate differences in
institutional contexts. First we acknowledged that while previous research has made strides into this area,
the overall approach has been scattered, and addressed this by conceptualizing a holistic framework of
approaches that entrepreneurs use to deal with the challenges these different institutional contexts bring.
Taken from the literature, we identify four potential responses entrepreneurs have when facing ineffective
institutions: (1) institutional entrepreneurship, (2) institutional bricolage, (3) institutional avoidance and
(4) institutional bridging. We then present a transaction cost-based model, suggesting that there are gains
to be had from transacting across institutional contexts. While involving multiple contexts increases the
transaction costs from managing those different institutional contexts, the savings from lower transaction
costs in a second institutional context may more than offset those costs.
This simple concept has implications for any firm that operates in an LDC, particularly
entrepreneurs in these contexts. There are three types of firms that may have this particular option. First,
firms that are formed in contexts constrained by institutional voids may find benefits from connecting to a
more predictable institutional context by gaining access to customers in new markets, and valuable
resources such as educated labor and cutting edge technology. For example, firms that develop Fair Trade
products aim to take advantage of these new markets, but may be able to go further by taking an

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8. Intl Ent, SMEs & Born Globals

institutional bridging perspective. Second, firms that have a social mission involving individuals in an
less developed institutional context may benefit their targeted groups more by connecting to a more
developed context. Social entrepreneurship aimed at poverty alleviation often targets these groups
(Kistruck et al., 2013; London et al. 2010). Finally, firms that exist in more developed contexts may have
an operational need to be in countries with less developed institutions, typically arising from a need for
raw materials or cheap labor. We suspect that these firms are already adept at appropriately distributing
their transactions across institutional contexts. In any case, a view toward institutional bridging gives new
insight into how these types of firms may operate more efficiently.
In terms of entrepreneurship, this paper demonstrates the advantages of firms from less developed
institutional contexts connecting with markets or resources in more developed institutional contexts. In
some cases, this may mean the increase of born-globals (Oviatt & McDougall, 2005) from an emerging
economy perspective. For example, as Internet access becomes more readily available in emerging
economies, firms from these contexts will have greater opportunities to connect with more established
markets and resources. In other cases, we describe an alternative for entrepreneurs facing ineffective
institutional contexts. Rather than institutional avoidance, institutional bridging gives entrepreneurs with
lower motivation a pathway to exploitation.
Finally, this manuscript provides greater nuance to TCE research by considering that involvement
in foreign institutional contexts may not necessarily be a net increase in transaction costs as is typically
assumed. In this paper we alter the typical theoretical perspective from focusing on a firm operating from
within an established context with (implicitly assumed) efficient factor and product markets entering into
less developed contexts to a firm that must operate from within an institutional framework where such
enabling institutions are poorly functioning, weak or even nonexistent and expand into contexts with
efficient institutions. By doing so, and using a TCE model, we can see that transaction costs may actually
decrease when incorporating additional contexts, even for INVs from less efficient contexts. This work
can provide the foundation for further inquiries into how the effectiveness of institutions alters decisions
based on transaction costs. Future work could examine our model empirically.

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8. Intl Ent, SMEs & Born Globals

Conclusion
In this paper we sought to explore the question: what can entrepreneurs do to overcome
institutional contexts rendered ineffective by institutional voids? We hoped to provide theoretical clarity
on this issue by first taking the scattered consideration of the internationalization of new ventures and
categorizing them according to two dimensions: motivation and knowledge of the new institutional
environment. The implicit assumption in this type of research is that the uncertainty inherent in new,
unknown institutional context will raise transaction costs for firms entering them. Through our transaction
cost model, however, we find that despite the uncertainty inherent in these new institutional environments
institutional bridging may actually allow entrepreneurs to decrease the cost of transacting as a whole.

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8. Intl Ent, SMEs & Born Globals

Figure 1. Entrepreneur responses to ineffective institutions based on motivation and relevant
knowledge
High Motivation
Institutional Entrepreneurship
Entrepreneurs are agents of
legitimacy, create / transform
specific institutions to align
with their interests through
mobilizing resources
Typically represent large
groups of individuals looking
to address a pressing need

High Knowledge

Low Motivation
Institutional Bricolage
Entrepreneurs make do with
the
available
existing
institutions, may combine
existing solutions in new
ways to overcome ineffective
institutions
May use existing connections
within business groups to fill
some subset of institutional
voids in imperfect markets

Institutional Bridging
Institutional Avoidance
Entrepreneurs
link Entrepreneurs stay within
environment with ineffective
boundaries
of
current
institutions
to
an
institutional context, avoid
environment
with more
interacting with a new
effective institutions
institutional context
Address multiple institutional Use avoidance tactics to deal
contexts as an entry mode
with institutional pressures
choice via joint venture,
alliances, or wholly-owned
subsidiaries

Low Knowledge

Figure 2. Example of Bridging Institutions

Scenario

TCIIC

Formula
A
B
C

TCEIC

Reduced Costs
in Ineffective
Institutional
Context

Relocated
Transaction
Costs

Additional
Costs from
Managing
Across
Institutions

=0

=0

=0

=0

=0

100

20

50

=0

10

TCBOTH

(100-50)+10+30 =
80
100
60
50
30
30
(100-50)+30+30 =
110
100
20
50
10
50
(100-50)+10+50 =
110
Where IIC = ineffective institutional context, EIC = effective institutional context

20

30

TC