by Juliet Oriaifo, Rui Torres de Oliveira and Kimberly M. Ellis

Emerging markets are known for their undeveloped market-based institutions. In these markets, firms, particularly small and medium enterprises (SMEs), are constrained in terms of  their development and growth due to the lack of institutional frameworks in place, which impact these firms’ resources and capabilities including human capital, access to capital, and supporting infrastructures. Therefore, undeveloped market-based institutions increase transaction costs and the cost of doing business for many firms operating in emerging markets.

For example, because of poor electricity supply, SME owners find it difficult to automate production process using machines and the lack of capital markets make it challenging to expand business operations.

Firms in emerging markets have overcome some of these undeveloped market-based institutions by frequently engaging with intermediaries, such as microfinance and human capital organizations. However, these intermediaries frequently produce incremental improvements and therefore having limited impact on SMEs and only for a short period of time.  A more transformative approach from intermediaries, on the other hand, could yield more impactful, long-term, and sustainable changes that promote SME growth and development.  Thus, in this research, we ask the question: How can intermediaries use a more transformative approach to meet the needs of SMEs in emerging markets having in mind features of the environment in which they operate? In this research, we are particularly interested in uncovering the mechanisms that intermediaries use to push for institutional change, particularly transformative ones.  These transformative changes are significant for SMEs operating in emerging markets because they are often seeking to expand firm operations, enhance the efficiency of production processes, meet quantity and quality demands, and obtain better public infrastructure.

We use a qualitative research design to study and understand how two transformative intermediaries in Nigeria use discourse to indirectly call for government intervention to address fundamental issues that appear within the formal institutions of emerging markets, and particularly institutions that influence SME growth and development. Our findings indicate that transformative intermediaries used rhetorical legitimation strategies (i.e. logos, pathos, ethos, autopoiesis, teleological, and anthropos) to communicate the needs of SMEs. While evidence exists that the first five strategies have been used in developed markets, the anthropos legitimation strategy which taps into the communal character of numerous African and East Asian cultures seems to be unique in emerging markets.  We find that these rhetorical strategies were used to connect with the public and were effective in driving institutional changes. These changes included infrastructural development, policy improvements, provision of machineries, and the formation of new local intermediaries to provide factor markets.

First, we learn that in order for SMEs to gain the attention of the government to address policy issues and meet their needs, SMEs must learn to partner with transformative intermediaries that are deemed as legitimate by the public. Doing so allows SMEs to communicate with the government through the voice of larger organizations, in this case intermediaries, which help to facilitate transformative institutional changes.

Second, this research explains how rhetoric follows a legitimating call for intermediaries via nonmarket strategies. Due to the lack of authority and power to call directly for institutional changes, these SME owners sought help from initial and emergent intermediaries who held positions that were state-sponsored and had the legitimacy to speak and be heard by others in the environment. Our results show that EE SMEs can use nonmarket strategies to influence their performance by reducing high transaction costs in the market; that is, reducing undeveloped market-based institutions. Because of the political nature of EEs, there is a need to better understand the role of institutions in reducing costs of production and market exchange. Thus, we show how EE firms can influence their institutional environments by developing more active strategic responses instead of passively adapting to their institutional settings; for example, navigating through undeveloped market-based institutions. Thus, we extend the understanding of nonmarket strategies by explaining that EE firms can use nonmarket strategies to legitimate intentions to fill undeveloped market-based institutions as well as to push for institutional changes.

Finally, our research explicates in detail how intermediaries establish legitimacy for actions and in doing so enhance institutional change necessary for SME development. This is an important contribution to the literature given that research on undeveloped market-based institutions typically focuses on what intermediaries do to fill voids, but it does not sufficiently explain how intermediaries are agents of institutional change. The current findings provide empirical evidence that rhetorical legitimation strategies can be used not only to encourage the involvement of emergent local intermediaries to fill undeveloped market-based institutions, but also persuade government officials in EEs to engage in various actions to fill undeveloped market-based institutions. This process is critical given that SMEs, which represent over 90% of the business population in emerging market contexts, are frequently at risk of failing. And, contrary to large or state-owned enterprises, SMEs are often neglected and do not attract the attention of policy makers and other governmental officials. Through the use of rhetoric, intermediaries work to develop community consciousness and unquestioning participation of multiple market actors to help fill undeveloped market-based institutions thereby facilitating the growth and development of SMEs.

About the authors

Juliet Oriaifo is an Assistant Professor of Management at North Carolina A&T State University. Her area of research lies in understanding firm and internationalization strategies of emerging market firms as they operate in poor market-supporting institutions. Her research has been published in Strategic Entrepreneurship Journal and Academy of Management Proceedings.

Rui Torres de Oliveira is a senior lecturer at Queensland University of Technology. His current research focuses on international entrepreneurship in emerging markets, institutional theory in emerging markets, strategy of merger and acquisition and decisions processes, and the impact of new technologies on management. His research has been published in the Global Strategy Journal, Strategic Entrepreneurship Journal, Journal of Business Research, and Small Business Economics, among other outlets.

Kimberly M. Ellis (PhD, Florida State University) is an Associate Professor at Florida Atlantic University. Her current research focuses on management of acquisition decisions/processes, firm-level diversity initiatives, and institutional factors in the African context. Her research has been published in the Academy of Management JournalGlobal Strategy JournalStrategic Entrepreneurship Journal, and Strategic Management Journal among other outlets.