Internal Market Failure for Firms in Emerging Economies: An Application of the Coase Theorem

Although emerging economies are responsible for a much larger share of world GDP, there are still few examples of emerging-economy-based firms that are excelling in high value-added activities that require specialized human capital investment. We argue that this situation is partly due to the institutional conditions in emerging economies. Previous research has pointed out that the institutional structure of emerging economies leads to higher costs for arm-length exchanges provides less support for market transactions leading to higher incidence of market failure. Much less attention has been paid to the institutional structure inside of firms. Applying the logic of the Coase Theorem, we argue that poorly-specified organizational property rights make for a series of firm inefficiencies that are collectively defined as internal market failures. Both external and internal market failures, in turn, make it difficult for EE firms to compete in global markets; particularly it is difficult to obtain resource based competitive advantages in high value-added, knowledge-based activities and industries. After reviewing and synthesizing research on the relationship between institutional environment and EE firm failures, we discuss the implications for management research and practice, and then provides several possible extensions for further research.