This chapter examines Khanna et al.'s idea that emerging economies are primarily characterized by important institutional voids (i.e., a lack of both local intermediary firms and broader macro-level institutions such as contractenforcing governmental institutions), and that the primary challenge for MNEs operating in emerging economies is to understand and deal with these voids. According to these authors, an emerging economy's institutional voids are even more important than traditional metrics (e.g., GDP analysis). Building on their theory, the authors supply a list of institution-related questions that senior managers should ask in order to assess whether and how to penetrate an emerging economy. These ideas will be examined and then criticized using the framework presented in Chapter 1.

Significance

Emerging economies are playing an increasingly important role in both the world economy and MNE strategic activity. Since the early 1990s emerging economies have provided the world's fastest growing markets for most products and services. MNEs are attracted to these countries as they offer potential cost and innovation advantages, and represent new output markets. First, the availability of relatively inexpensive skilled labour and trained managers in emerging economies offers MNEs lower manufacturing and service costs. Second, these economies can also give MNEs access to a different genre of innovation than can be found in mature markets. The foundation of such innovation often resides in the creativity of individuals driven to find original solutions to meet basic needs of large but poor segments of the emerging economy's population.