Investments during institutional transitions: Driven by problems or opportunities?

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.