Understanding The Physical Infrastructure Institution of A Country’s Institutional Environment

Institutional infrastructure is important to the operation of businesses within a country because it helps business communications and the movement of goods from their source to the ultimate consumer. Physical infrastructure includes such aspects as the amount and quality of roads and highways, number of telephone lines per capita, and the number of airports. The availability of physical infrastructure often plays an important role in decisions to enter a new international market by a foreign firm because it tends to perform more poorly in countries with underdeveloped infrastructure.

Therefore, countries that wish to attract foreign investment must try to develop their physical infrastructure. Without a good physical infrastructure, it is difficult for firms to distribute their products to potential customers. Thus, they either have to sell to smaller markets because they are unable to reach as many potential customers, or they have to distribute their products in much more costly ways. In either case, the firm earns lower profits than it would if the country’s physical infrastructure was well developed.

IMPORTANCE OF THE INSTITUTIONAL ENVIRONMENT

Economic growth is vital to most countries because it contributes to the standards of living, health, and welfare of their citizens. Economic growth is important to local and foreign firms as well. Higher rates of economic growth suggest greater market opportunities for all firms and attract new business development and foreign investments in the country’s economy.

Beyond the attractiveness of a country’s economic development and health, its laws, regulations, political stability, and physical infrastructure play an important role in firms’ behaviors. More specifically, multinational firms looking to invest in new international markets need to understand these factors of a country’s institutional environment. These institutional dimensions can greatly affect a firm’s willingness to make direct investments in a country’s markets. Furthermore, recent research shows that the large presence of multinational firms in a country strongly influences the development of the country’s institutional environment. For example, the greater number of multinational corporations in a country, the greater the pressure on government to develop and enforce legislation to reduce corruption.

The influences are partly because of these firms’ effects on the country’s economic development and growth. Corruption also discourages foreign companies from making major investments in a country. As explained later in this chapter, institutional environments have a major effect on firms’ international strategies and especially affect which countries firms enter. While institutional forces play an important role in determining firms’ behaviors within a country, societal culture plays an equally strong role. Culture’s effects may be more pervasive because of its influence on human behavior.


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