Peng and Heath (1996)

Management > Comparative Management > Lectures > Independent Research > Peng and Heath > Institutions > Formal institutions > Informal institutions > Growth strategy

Growth strategy

State firms in planned economies are under pressure to grow in order to stay afloat in the newly created market economy. MNEs and the rise of private, local firms are threatening their positions, as they are more innovative and can cope with the economic change better.

Expansion in the traditional sense is not really applicable for SOEs, as they are already massive in size - what they need is an expansion in technical and organisational abilities. Expansion requires excess resources, of which SOEs have many, due to their inefficient allocation of resources in the past and a tendency to hoard everything.

A lack of strategic factor markets inhibits the sale and lease of such assets and prevents firms from creating enough of their own capital to develop innovations. In addition, that managers have acted as agents of the government for years means they are used to taking orders and not innovating.

The authors believe that a network-based growth is the best strategy, as it uses the existing informal institutions of networking in Russian firms. This is a useful strategy, as it avoids bureaucratic costs in internalising options. The boundaries between firms blur, but direct ownership is rare.

This is better than a generic growth strategy, as the latter involves continuous internalising, with increasing bureaucratic costs (and a lack of corporate governance means that a legal institution prevents effective internalisation).

M&As would incur bureaucratic costs and raise transaction costs when operating to acquire other firms.

In a volatile environment, networking creates a mutually supporting environment

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