Institutional Distance and International Business Strategies in Emerging Economies

Abstract

The concept of 'distance' has been used by international business scholars to explain variations in international business strategies and operations across countries. The more distant a host country is from the organizational centre of a multinational enterprise (MNE), the more it has to manage cultural, regulatory and cognitive differences, and to develop appropriate entry strategies, organizational forms, and internal procedures to accommodate these differences.Scholarly research has focused on the concept of psychic distance, which has been narrowed down in empirical work to indices based on Hofstede's work on culture. However, these measures capture only very partially the dimensions of distance of concern to international business. In this paper, we show how the broader theoretical concept of institutional distance, which incorporates normative, regulatory and cognitive aspects, affects entry strategies. Specifically, our theoretical arguments suggest that the impact of distance varies with different aspects of the concept of institutional distance, and that this impact interacts with both the investor's experience and with the relative importance of the pertinent operation for the investing MNE. Using a unique dataset of foreign direct investment in emerging economies that incorporates multi-host as well as multi-home countries, we find empirical support for our propositions, and provide an explanation for apparently inconsistent results in the previous literature.

Do We Need to Distance Ourselves from the Distance Concept? Why Home and Host Country Context Might Matter More Than (Cultural) Distance

“…The remaining four multiple home/host country studies all find non-significant results, even though two predicted a positive (Pangarkar and Klein 2001;Harzing 2002) and two a negative (Ackerman 2005;Estrin et al 2007) relationship between cultural distance and a high control entry mode option. Particularly noteworthy is Pangarkar and Klein 0 s (2001) study as it offers the chance to isolate the effect of cultural distance.…”

Institutional distance and knowledge acquisition in international buyer-supplier relationships: The moderating role of trust

“…In parallel with prior studies on institutional distance (e.g., Gaur & Lu, 2007;Ionascu, Meyer, & Erstin, 2004), we adopted 7-item and 5-item scale measures from The Global Information Technology Report 2010-2011 (Dutta & Mia, 2011) to reflect the regulatory and cognitive distances, respectively; we also used 6-item scale measures from Hofstede's (2011) cultural dimension indicators to represent normative distance. Regulatory institutions lay out the ground rules for doing business, reflecting the laws and regulations of a country that influence business strategies and operations; normative institutions consist of beliefs, values, and norms that define expected behavior in a society; and cognitive institutions rest on the cognitive structures, widely shared social knowledge, frames, routines and scripts, embedded in a society (Ionascu et al, 2004).…”

“…Regulatory institutions lay out the ground rules for doing business, reflecting the laws and regulations of a country that influence business strategies and operations; normative institutions consist of beliefs, values, and norms that define expected behavior in a society; and cognitive institutions rest on the cognitive structures, widely shared social knowledge, frames, routines and scripts, embedded in a society (Ionascu et al, 2004). Accordingly, the selection of the appropriate measures is based on the relevance to the research scope of ICT industries in Taiwan.…”

Global cities and liability of foreignness

“…The definition of regulatory institutions incorporates all possible aspects of regulation, which makes it very difficult to cover all aspects empirically, but as recommended by Ionascu, Meyer, & Estrin (2004) I utilised a wide selection of variables to cover a broad range of the regulatory institutions. The first two indicators cover the ease of which businesses can obtain information about changes in government policies and regulations affecting their activities, as well as favouritism shown by government officials to well-connected firms and individuals when deciding upon policies and contracts.…”

“…The dimensions identified by Hofstede (Table 4) deals with stereotypes and symbols in terms of power distance, individualism/collectivism, masculinity/feminism, and uncertainty avoidance. Hofstede has since the introduction of the four cultural dimensions added two more dimensions, but they are often excluded in studies incorporating a composite index of cultural distance due to missing data (Kogut & Singh, 1988;Ionascu, Meyer, & Estrin, 2004;Kandogan, 2012). Power distance Society's acceptance of unequal distribution of power.…”