Formal institution deficiencies and informal institution substitution: MNC foreign ownership choice in emerging economy

Chan, Christine M.; Du, Jialin

doi:10.1016/j.jbusres.2022.01.016

Cited by 18 publications

(7 citation statements)

References 126 publications

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“…Our study finds that formal institutions enhance the effectiveness of informal institutional constraints, based on an institutional interaction framework, which helps us to better understand the interaction effects of formal and informal institutions in the location choices of foreign firms. Thus, Consistent with Chan and Du (2022) and Gaur et al (2022), our study helps to promote a more interactive institution-based perspective.…”

Section: Theoretical Contributionssupporting

confidence: 79%

“…As Beugelsdijk et al (2010) showed, IB scholars tend to regard "location" as being the synonymous with "country, " and often assume country or national borders as the unit of analyses. However, such dominant focus on cross-country variations can be incomplete and sometimes even problematic (Chan and Du, 2022), because "the types of subnational spatial variation ignored by analyses based on country averages are precisely what shape firm location strategies" (Beugelsdijk and Mudambi, 2013). In this study, we focus on institutional differences within host countries and examine how MNCs make locational choices of foreign subsidiaries in specific institutional environments at the subnational level.…”

Section: Theoretical Contributionsmentioning

confidence: 99%

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Social trust and the location choices of foreign firms in China–The moderating role of formal institution and cultural distance

Shen

Yang²,

Yu³

et al. 2023

Front. Psychol.

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The institutional environment has a significant impact on the location of overseas investments by multinational enterprises (MNEs). However, there remain two research gaps. First, fewer studies focused on the impact of subnational regional institutions on the location choices of MNEs. Second, study on informal institutions has been more limited. This study investigates the effect of the informal institution (social trust) in the Chinese subnational region on the location choices of foreign firms and the mechanism of its role. Using the sample of foreign firms’ location choices in China from 2008 to 2020 in Orbis Global Enterprise Database, this study finds that social trust positively related to the location choices of foreign firms in subnational regions. Our results also show that this positive effect is contingent on the formal institution and the cultural distance between home and host country. When the formal institution is strong and the cultural distance between home and host country is high, social trust has a more significant positive impact on the location choices of foreign firms in subnational regions. Besides, the results show that cost advantage, information advantage and innovation advantage are important mechanisms for social trust to influence foreign firms’ location choices in subnational regions. This study is important for understanding the role of subnational regional informal institutions in influencing strategic decisions of MNEs. At the same time, it has certain guiding significance for governments in attracting foreign direct investment and for multinational enterprises in selecting suitable overseas investment locations.

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Section: Theoretical Contributionssupporting

confidence: 79%

Section: Theoretical Contributionsmentioning

confidence: 99%

Social trust and the location choices of foreign firms in China–The moderating role of formal institution and cultural distance

Shen

Yang²,

Yu³

et al. 2023

Front. Psychol.

View full text Add to dashboard Cite

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“…Thus, the theoretical underpinning of the pro-market view of institutions is developed on the basis of transaction costs (North, 1990(North, , 1992Williamson, 1985Williamson, , 1991. Transaction costs 'include all the costs associated with conducting a purchase, sale or other enterprise-related transaction' (Khanna and Palepu, 2010: 17), such as the cost of searching for information, the cost of negotiating with economic agents, the cost of enforcing contracts and protecting intellectual property rights, the cost of monitoring, or the cost of capital (Chan and Du, 2022;North, 1990). In addition to economic costs, transaction costs can also be related to time, such as the time it takes to build a warehouse or establish a greenfield site in a new country (Khanna and Palepu, 2010).…”

Section: Institutional Economics Theory: the Institutional Profile Ef...mentioning

confidence: 99%

“…As a result, they may lack the experience and knowledge necessary to operate in countries with institutional deficiencies, leading to higher transaction costs in such contexts. For instance, in the absence of knowledge on how to navigate informal markets, these MNEs would face significant information search and monitoring costs (Chan and Du, 2022;Khanna and Palepu, 2010). The transaction cost logic underlying the institutional profile effect is largely applicable to these MNEs, as their limited institutional knowledge hinders their ability to conduct efficient transactions in countries with low quality institutions.…”

Section: Hypotheses Experiential Learning As a Boundary Condition Of ...mentioning

confidence: 99%

When does high institutional quality explain the presence of multinational enterprises in a foreign country? Experiential and vicarious learning as boundary conditions

Domínguez,

Gómez,

Maícas

2023

Strategic Organization

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Institutional economics theory predicts that multinational enterprises (MNEs) operate in foreign countries with high institutional quality, which is known as the institutional profile effect. Nevertheless, the predictions of this theory seem to diverge from the international presence of certain MNEs, raising questions about the broader applicability of the institutional profile effect. We posit that the phenomenon of learning by MNEs offers an explanation for the occasional ineffectiveness of the institutional profile effect in specific contexts. Thus, we seek to answer the following research question: What types of learning reduce the probability of MNEs operating in countries with high institutional quality? To address this question, we investigate the role of experiential and vicarious learning as boundary conditions for the institutional profile effect, and compare their respective effects. Through our empirical analysis of a sample comprising 60 telecommunications MNEs, 39 home countries, and 145 host countries, we find that both experiential and vicarious learning have a negative moderating effect on the institutional profile effect. Furthermore, our findings indicate the existence of a cumulative effect resulting from the combination of different types of learning.

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“…Liu et al [4] introduced property certificates into the model of the influencing factors of farmers' behavior to WRH, and Sun and Zhao [17] explored the impact of social trust on farmers' WRH. However, many studies have shown that formal and informal institutions do not operate independently of each other in influencing farmers' behavior, and they are intricately intertwined in the multidimensional and complex institutional environment [36,37]. We can understand the actual effects of such environment only by simultaneously examining multiple institutions.…”

Section: Introductionmentioning

confidence: 99%

Formal and Informal Institutions in Farmers’ Withdrawal from Rural Homesteads in China: Heterogeneity Analysis Based on the Village Location

Wang

Zhao

Cui

et al. 2022

Land

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Withdrawal from rural homesteads (WRH) in China is mainly conducted under the guidance of government and follows the principle of farmers’ voluntary participation, in which both formal and informal institutions play essential roles. However, few studies have systematically analyzed the institutional factors in WRH. By introducing both formal and informal institutions into the analysis framework, the aim of this study was to explore the impacts of formal and informal institutions on farmers’ behavior to WRH, and the interaction between formal and informal institution in different villages. Based on survey data from farmers in Jinzhai, China, this study adopted a binary probit model and factor analysis. (1) The study revealed that farmers’ cognition of homesteads property rights and their trust in village cadres are the key formal institutional factors affecting farmers’ behavior to WRH, and farmers’ social networks, reciprocal norms, and trust in villagers are the key informal institutional factors affecting farmers’ WRH; (2) Both formal and informal institutions promote farmers’ WRH, and informal institutions play a more important role. However, there is no interaction between formal and informal institutions in the whole sample. (3) Furthermore, the effect of formal and informal institutions on farmers’ WRH have the heterogeneity of village location: there is a complementary relationship between formal and informal institutions in farmers’ WRH for villages with a medium proximity to the county seat, and a substitution relationship for villages far away from the county seat. Finally, this study discusses the implications of these findings on the new round of WRH policy.

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Formal institution deficiencies and informal institution substitution: MNC foreign ownership choice in emerging economy

Cited by 18 publications

References 126 publications

Social trust and the location choices of foreign firms in China–The moderating role of formal institution and cultural distance

Social trust and the location choices of foreign firms in China–The moderating role of formal institution and cultural distance

When does high institutional quality explain the presence of multinational enterprises in a foreign country? Experiential and vicarious learning as boundary conditions

Formal and Informal Institutions in Farmers’ Withdrawal from Rural Homesteads in China: Heterogeneity Analysis Based on the Village Location

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