Strategic asset-seeking foreign direct investments by emerging market firms: the role of institutional distance

Abstract

PurposeThis study examines the impact of formal and informal institutional distances on the foreign ownership strategies of emerging market firms (EMFs).Design/methodology/approachThis is an empirical study relying on two sets of data collected over two time periods, 2006–2008 and 2017–2019, for publicly-listed Chinese companies.FindingsGreater formal institutional distances in the host and home countries make EMFs less likely to use joint ventures (JVs), while greater informal distances make EMFs more likely to use the JVs. When both formal and informal institutional distances are high, the use of JVs is more likely. These results are affected by the goal of the foreign direct investment (FDI) project, with strategic asset-seeking (SAS) FDI projects favoring the use of wholly owned subsidiaries (WOSs).Research limitations/implicationsThis study relies on cross-sectional data from publicly-listed Chinese companies, which may limit the generalizability of the findings.Practical implicationsEMFs investing in advanced countries should carefully assess the tradeoffs between transactional cost efficiency and legitimacy in making their foreign ownership decisions. If the goal is to access strategic assets, EMFs should consider WOSs to ensure the transfer of strategic assets and create value for the parent company.Originality/valueThe findings show that formal and informal distances between institutions have different impacts on foreign ownership strategies, providing empirical evidence for the need to balance conflicting cost-efficiency and legitimacy considerations when businesses make such strategic decisions. The authors show how this balance depends on the goal of the FDI project.

Institutional distance and cross-border acquisitions into emerging markets: the moderating effect of context experience

“…We, therefore, selected cross-border acquisitions executed by Italian acquirers to keep the home country of acquirers as an element of homogeneity in our sample, which is fully consistent with recent studies keeping a single country on the acquirer side (e.g. Yang et al, 2022). Furthermore, since our focus is on the acquisition decision, our sample included only completed transactions and thus excluded announcements, rumors and demergers.…”

“…Formal institutions include regulative, political and economic factors (Yang et al, 2022) and determine the level of stability, market failure, uncertainty and information complexity in Distance and context experience in M&As transactions. Hence, by affecting the perceived risk, formal institutions affect the attractiveness of a given foreign direct investment (Romero-Martinez et al, 2019) and the foreign market entry mode that will be preferred (Arslan and Larimo, 2011;Yang et al, 2022).…”

“…Informal institutional distance. Informal institutional distance relates to differences in the values and norms between countries (Estrin et al, 2009) and may have a remarkable effect on strategic firm behavior (Arslan and Larimo, 2011;Romero-Martinez et al, 2019;Yang et al, 2022). Following an established approach in the literature, informal institutional distance is…”

“…Distance and context experience in M&As captured by differences in national cultures (Dikova et al, 2010;Yang et al, 2022;Zheng et al, 2022). Culture is indeed an informal institution that contributes to the diversity of local contexts and to the liability of foreignness associated with becoming embedded in a foreign location (Zaheer and Mosakowski, 1997;Yang et al, 2022). For example, based on a panel of 43 countries during 2003, Zheng et al (2022 find a U-shaped relationship between cultural distance and the efficiency of outward investments so that for low levels of cultural distance, the liability of foreignness is more important and the efficiency of outward FDI is reduced; as an opposite, for high levels of cultural distance, the efficiency of outward FDI is improved.…”

“…Specifically, we adopted a broad classification of emerging markets and included emerging, frontier and standalone markets, that is, all countries not considered in the "developed" category of the MSCI World Index. In our sample, 96 out of 496 acquisitions (19% of the total sample) were executed in emerging markets, while the remaining 400 (81%) were In terms of the independent variables, all our distance measures between the host country and Italy were computed using the following equation (Yang et al, 2022):…”