Institutional Distance and Foreign Subsidiary Performance in Emerging Markets: Moderating Effects of Ownership Strategy and Host-Country Experience

Abstract

Institutional distance has been known to be an important driver of Multinational Enterprises' strategies and performance in host countries. Based on a large panel dataset of 10,562 firms operating in 17 emerging markets and spanning 80 home countries, we re-examine the relationship described by Gaur and Lu (J Manage 33 (1): 2007) between regulatory institutional distance and subsidiary performance. We extend this research by (1) examining this relationship in the context of emerging markets, (2) examining the moderating effects of ownership strategy and host-country experience within the context of emerging markets and (3) accounting for a greater variety of institutions by including a large number of home and host countries. We find that institutional distance negatively affects subsidiary performance in emerging markets. Our findings also show that the negative effects of institutional distance on subsidiary performance are lesser for subsidiaries with partial ownership (than for subsidiaries with full ownership) and for subsidiaries with greater host-country experience. We discuss our findings with respect to Gaur and Lu's model, which explores the relationships between these variables in a general context.

The Influence of Risk Culture on the Performance of International Joint-Venture Securities

“…This cultural difference results in foreign and Chinese shareholders adopting different value judgments when weighing the risk returns of a specific project. Notably, this mechanism is different from "information asymmetry," even though the information environment is poorer than in developed markets [8], as it is not because foreign shareholders cannot access some private information. Cultural differences allow foreign shareholders to make different value judgments based on the same information as their Chinese counterparts.…”

“…Due to the country's large population and complicated social environment, the legislative process of the Chinese capital market is slow and the strict enforcement of laws is difficult. In addition, some regulations have been enacted by regional rather than national regulators, which further increases uncertainty [8]. In this condition, participants have a higher expectation of risks and are more accepting of uncertainty.…”

“…The dominant view showed that cultural distance has a negative effect on performance because of the higher cost of coordination, management, and operation [5,6,8,9,27,[45][46][47]. Using a sample of 10,562 overseas subsidiaries in 17 emerging market countries, Shirodkar and Konara [8] found that cultural distance resulted in poor performance. Beugelsdijk et al [5] analyzed 156 literatures, indicating that cultural distance has a strong negative impact on the performance of subsidiaries.…”

“…As a type of cross-border cooperation by FDI, IJVS regularly faces cross-border management involvement [4]. This makes the performance even more susceptible to various factors, for example, culture [5][6][7][8][9]. Although many scholars found the impact of culture on performance, the results remain mixed, especially for emerging markets, and to the best of our knowledge, there are no studies investigating the role of cultural difference in explaining the poor performance of IJVS.…”

Institutional Differences, Foreign Ownership Modes, Marketing Capabilities and Domestic Technological Catch-up: Evidence from India

“…These three factors, namely, institutional differences, marketing capabilities and foreign ownership modes combined together provides us with a unique setting to investigate technological catch-up in the context of India. Whereas higher institutional differences between foreign firms' home and host country negatively affects their host country performance (Shirodkar and Konara 2017), the impact of such institutional differences on domestic firms is yet to be investigated. Moreover, FDI from institutionally close and institutionally distant markets may induce different inter-firm interactions and linkages between domestic and foreign firms.…”