Multinational enterprises (MNEs) attempting to create social value in base of the pyramid (BoP) economies are encumbered by unique market and institutional barriers. To overcome these challenges, BoP scholars have advocated the strategy of using embeddedness as a replacement for inefficient formal institutions. Reliance on informal social ties for coordinating market exchange, however, leads to costly investments, exposure to opportunism and the creation of nontransferable capabilities. This paper aims to investigate these issues.

The authors argue that embeddedness should be used as an intermediate step toward developing more enduring formal institutions rather than as a replacement for them.

The authors put forward the notion of proto-institutions as a useful concept for exploring how MNEs can engage in co-designing efficient and inclusive institutional forms aimed at engendering long-term social value creation.

The authors identify three institutional fields wherein MNEs can leverage social embeddedness to develop proto-institutions that are potentially transferable to become formal institutions. First, MNEs can build governance institutions that can enhance coordination among local actors. Second, MNEs can experiment with small-scale change and adaptation of market institutions that reduce transaction costs and facilitate market exchanges. For example, improved institutional practices in value chain governance can boost business performance while also improving the livelihoods of supply chain partners. Finally, the authors discuss the potential for developing favorable socio-cultural institutions by introducing new principles of organizing or educational practices.