The Effects of Institutional Distance on Foreign-Owned Subsidiary Development: The Case of the Northwest of England

Abstract

The purpose of this paper is to analyse the effects of institutional distance on foreign-owned subsidiary development. In particular, a distinction between direct and indirect effects of formal and informal institutional distance is proposed and empirically tested. Based on a bespoke census database of all known foreign-owned subsidiaries in the Northwest of England a postal survey has been conducted. The results indicate that informal institutional distance does have a pronounced negative effect on the level of intra-and inter-organisational relationships and decision-making autonomy in foreign-owned subsidiaries. The direct effect of formal institutional distance seems to be less relevant, however, it is becoming significant when the interaction between formal and informal institutional distance is considered. The specific contribution of this study lies in the systematic and comprehensive investigation of the formal and informal institutional distance between home and host country and their effects on subsidiary development. It is one of the first studies to provide a theoretically sound investigation, based on new institutional economics and internalisation theory, of the interaction between formal and informal institutional distance in the context of foreign-owned subsidiaries.

International Hotel Strategy and Institutional Distance: A Conceptual Framework

“…This makes this perspective in particular relevant to the international business context in which transactions and company structure are embedded in numerous institutional contexts. NIE bridges therefore the levels of institutions and firms (Martin, 2014;Dahms, 2014). It allows a predictive; economics based perspective on institutions that is in line with broader international business strategy frameworks due to similar underlying and transparent assumptions such as bounded reliability, non-zero contracting costs, and asymmetric information, which are prevalent in internalisation theory (Henisz & Williamson, 1999;Verbeke & Greidanus, 2009).…”

“…It allows a predictive; economics based perspective on institutions that is in line with broader international business strategy frameworks due to similar underlying and transparent assumptions such as bounded reliability, non-zero contracting costs, and asymmetric information, which are prevalent in internalisation theory (Henisz & Williamson, 1999;Verbeke & Greidanus, 2009). This particular view on institutions makes it possible to understand institutional differences and their potential advantages, such as location-specific advantages in form of abundant inter-firm networks or human capital (Dahms, 2014). In the same time, it leaves enough room to argue for the potential of firm-specific advantage creation and transfers by firms and their subsidiaries through an advanced intra-firm network for instance (Rugman & Verbeke, 2001).…”

“…The institutional perspective plays an increasingly important role in the wider international business literature (Peng et al, 2008;Martin, 2014;Dahms, 2014). Three main institutional perspectives can therein be identified.…”

“…Although the concept is not without its shortcomings (c.f. Shenkar, 2001;Zaheer et al, 2012;Dahms, 2014), it has various advantages, which appear at the current stages of research, outweigh its disadvantages. Firstly, it is a concept that has emerged from the early entry mode studies related to transaction cost economics that provides a theoretical coherence with prevailing organisational economics theories in international business frameworks (Kogut & Singh, 1988).…”

“…Much less is being said about the strategic development of international hotels sites in institutional distant locations. Furthermore, formal institutions are predominantly viewed as frictional, but rarely as enablers for strategic decisions (Dahms, 2014;Martin, 2014).The reasons for that could be twofold. The first point concerns the theoretical development of the field.…”