“IN GOD AND IN CORRUPTION WE TRUST”:
AN INSTITUTIONAL PERSPECTIVE ON MNE
MARKET SEEKING IN ASIA
The effect of corruption and religion on MNEs’ location choice within
the Asian alcoholic beverages industry
Amsterdam Business School | Faculty of Business and Economics Master Thesis | Business Administration | International Management
Name: I. A. M. (Myra) Wiracita
Student nr.: 6128432
Email: iam.wiracita@gmail.com
Supervisor: Dr. Vittoria Scalera
STATEMENT OF ORIGINALITY
This document is written by Student I.A. Myra Wiracita who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
ACKNOWLEDGEMENT
There are three people I would like to acknowledge in particular, as I could not have written this paper without them. First, I would like to express my gratitude to my thesis supervisor Dr. Vittoria Scalera for her guidance, her patience and valuable advice. Her insights and feedback were a great support to me in writing this paper. I would also like to thank my grandfather Jaap van Velzen † for inspiring and encouraging me throughout my life with his wisdom and unrivaled perseverance. Finally, I would especially like to thank my daughter Isabella for keeping me motivated and persistent to complete my Masters’ degree.
TABLE OF CONTENTS 1. INTRODUCTION 1 2. THEORETICAL FRAMEWORK 5 2.1 Literature review 5 2.1.1 Institutional theory 5 2.1.2 Psychic distance 9
2.1.3 MNEs incentives for FDI 13
2.1.4 Market-seeking FDI 18
2.1.5 Corruption and institutional quality 20
2.1.6 Religion and product demand 29
2.1.7 GDP per capita and consumer wealth 32
2.1.8 Tourism and national openness 33
2.2 Research gap 35
2.3 Hypotheses development 37
2.3.1 The conceptual framework 37
2.3.2 The effect of host country corruption 38
2.3.3 The effect of corruption distance 40
2.3.4 The effect of religious views 41
2.3.5 The moderating effect of consumer wealth 44
2.3.6 The moderating effect of national tourism 45
3. METHODOLOGY 47
3.1 Research design 47
3.2 Sample and data collection 48
3.3 Variables description 50 3.3.1 Dependent variable 50 3.3.2 Independent variables 52 3.3.3 Moderators 54 3.3.4 Controls 56 3.4 Analytical strategy 60 3.4.1 Sample quality 60
3.4.2 Method of data analysis 62
4. RESULTS 66
4.1 Sample characteristics 66
4.1.1 Descriptive statistics 66
4.1.2 Pearson correlation matrix 69
4.2 Binary logistic regression 76
4.2.1 Model 1 – Baseline 77
4.2.2 Model 2 – Independent variables 78
4.2.3 Model 3 – Moderator 1 82
4.2.4 Model 4 – Moderator 2 86
5. DISCUSSION AND CONCLUSION 90
5.1 Key findings 90
5.2 Implications for policy makers and managers 92
5.2.1 Theoretical implications 92
5.2.2 Managerial implications 93
5.3 Limitations and recommendations 95
5.3.1 Limitations of this study 95
5.3.2 Recommendations for future research 96
5.4 Conclusion 96
REFERENCES 98
APPENDIX 104
LIST OF FIGURES AND TABLES
Figure 1 Conceptual model
Table 1 Home country number of MNEs and their dispersion
Table 2 Variables’ description, operationalization and outcomes
Table 3 Bivariate correlation matrix and descriptive statistics
Table 4 MNE Presence and characteristics per host country
Table 5 Multicollinearity test
ABSTRACT
This paper explores the relationship between host countries’ institutional perspective, expressed in corruption and religious implications, on MNE foreign location choice. The research setting is the alcoholic beverages industry in Asia. Our sample includes 39 MNEs from all over the world that are present in fifteen Asian host countries. The purpose of this research is to determine whether and to what extent corruption and religion as institutional powers have a significant impact on the MNE’s location choice and market selection. Corruption was used to proxy formal institutions. In turn, religion was used as a proxy for informal institutions from a product demand perspective. Together, corruption and religion can be perceived as the outcome of the institutional environment. This study addresses the effect of weak institutions and institutional distance and explores the moderating effect of host country wealth as well as openness which are measured in GDP per capita and tourism receipts resp. Findings suggest that corruption and religious constraints towards products have a negative impact on MNE location choice, but that these negative effects can be moderated by wealth and openness of the host country. This research contributes to the existing literature by addressing, formal as well as informal, institutional powers’ effects as a whole on locational determinants MNEs face when seeking for markets in Asia within the alcoholic beverages industry.
Keywords: MNE, location choice, alcoholic beverages, psychic distance, country-level characteristics, institutions, culture, corruption, corruption distance, religion, religious constraints, wealth, GDP, openness, connectedness, tourism
1
1 INTRODUCTION
“Corruption has become a very serious problem facing the world. Consequences of corrupt
acts cut across economic, social, and political spheres of the society. It is detrimental to individuals, organizations, and nations” (Agbo & Iwundu, 2016, p.519). On a global level, corruption continues to be a large problem. Major corruption scandals still occur on a large scale and have a unfavorable impact on society and economy (Transparency International, 2015).
Since the world is globalizing at a fast pace, multinational enterprises’ (MNEs) foreign location choice as part of their foreign direct investment (FDI) strategy is one of the most important decisions for managers to make to compete within their industry (Isenberg, 2009; Buckley & Casson 2009; Peng, Sun, Pinkham & Chen, 2009; Brouthers & Hennart, 2007; Kim
& Aguilera, 2015; Beugelsdijk, Kostova, Kunst, Spadafora & van Essen, 2018). Some scholars see MNEs as the key drivers of globalization, as they foster increased economic interdependence among national markets (Rugman & Verbeke, 2004, p. 3), others suggest that globalization drives firms to expand outside of their home market (Brouthers & Hennart, 2007, p. 395). Conversely, MNEs are interrelated as one does not exist without the
other and both enhance each other (Buckley & Casson 2009, p. 1573).
Before an MNE decides to enter a foreign market, the MNE must assess the chance to succeed in that location (Buckley & Casson 2009). Hereby, the MNEs potential return needs to be weighed against the risks and costs associated to operating in the unknown foreign environment (Dunning, 1998; Rugman, Verbeke & Nguyen, 2011), as the benefits of FDI must
2 successfully enter and establish itself, the MNE is dependent on the characteristics of the host country, including the openness of the host country’s economy, the size of the market, product demand potential and the level of government control over its institutions (Dunning,
1998; Rugman et al, 2011; Porter, 1990; Ghemawat, 2003; Pan & Tse, 2000).
In addition, the quality of the host country’s institutions is an important factor too. In this study the quality of institutions refers to the effectiveness of the country’s formal institutions, including economic development, a supportive business environment and openness to trade and the outside world (Coeurderoy & Verbeke, 2016), whereas cultural
difference reflects the differences between the home and host country’s informal institutions (North, 1991; Kim & Aguilera, 2016; Rugman et al, 2011). Hereby, it’s important to note that government as well as society’s attitude towards the MNE, it’s products or the MNE’s home country are of great significance (Makino, Isobe & Chan, 2004; Brouthers & Hennart, 2007;
Buckley & Casson, 2009). When government and society have a positive attitude towards the MNE and its products, this will increase its changes to succeed. However, when their attitude is hostile, the MNE is more or less doomed to fail in that particular country (Buckley & Casson, 2009). Hence, the MNE will design its management approach and strategy based on the outcome of this assessment (Horner, Baack & Baack, 2016).
In contrast, as corruption can be used to measure the quality of formal institutions, another measure is required for the cultural differences between countries. Hereby focusing on the cultural aspects which influence society’s world view and morals, cultural distance can be reflected in differences in religious views (Yiu & Makino, 2002; Volonte, 2015; Benabou, 2008; Alesina & Giuliano, 2015; Paldam, 2008; Richardson, 2014; Saroglou,
3 approach of MNEs. Religious views may impact the attitude of society towards certain products. Different religions prescribe different rules which impact society as a whole. Where in non-Islamic countries it is accepted to consume alcohol, this is strictly forbidden in
a lot of Islamic countries (Kalema, Vanderplasschen, Vindevogel, & Derluyn, 2016). However, the strictness of these rules may vary amongst Islamic countries as well (Verbeke, 2006).
However, although the LoF rises when psychic distance increases (Berry, Guillen & Zhou, 2010; Beckerman, 1956, in Isenberg, 2009), an MNEs’ main objective is to be profitable and create value for its shareholders (Dunning, 1998; Brouthers & Hennart, 2007). When
profit opportunities are identified, managers will make a trade-off between the cost and potential profit (Buckley & Casson, 2009).
This study contributes to the existing literature by investigating the relationship of two powerful constructs which are tightly interwoven into the political and societal
environment by measuring their effect on MNE location choice. In this context, MNE presence indicates how attractive a host country in fact is. In this view, the factors which contribute to the MNEs location choice are interesting to investigate from an international business perspective. The results will provide insight in to which extent institutional differences between the home and host country affect the MNE’s location choice when
exploring foreign markets. These findings can be helpful for governments as well as managers whom wish to participate in international business. Furthermore, this study provides an academic contribution to the existing literature within this topic by addressing the identified research gap. To capture the above, the following research question is set out to answer:
4 What is the effect of corruption and religion in the host country on MNEs’ location choice and
how do tourism and wealth affect this consideration?
This study proceeds as follows. First, the current and relevant literature regarding this topic will be reviewed with respect to the effect of the host country’s corruption level and religion on MNE location choice. First, the main concepts and findings of the existing literature will be discussed. Second, a relevant and important research gap will be identified from the limitations and suggestions proposed in the literature. Third, by building upon the
literature review, the conceptual framework will be presented as well as the statement of the hypotheses. Fourth, I will present the research method and thereafter explain and address the results. Finally, the theoretical and practical contributions of this study will be discussed and provided with a conclusion.
5
2 THEORETICAL FRAMEWORK
In this chapter a detailed theoretical background for this study will be built. First, a review of the existing literature with respect to the factors influencing MNE location choice will be
provided. Hereby, the impact of institutional powers, MNE incentives for FDI and economic and social factors of the host country will be explored. Second, as a result of the literature review, a relevant research gap will be identified. To conclude this chapter, the identified relationships are conceptualized and further explored leading to the formulation of the hypotheses.
2.1 Literature review
The following section presents the main concepts related to this topic. In the first part, institutional theory and the concept of psychic distance will be introduced and explained.
Then, the main concepts of MNE incentives for FDI will be described from the literature including the factors influencing MNEs location choice. Hereafter, the key studies with respect to corruption and religion will be analyzed and connected to institutional theory and psychic distance. In addition, implications and consequences of corruption and religion as well as contrasting views and different findings will be discussed.
2.1.1 Institutional theory
Institutions can be defined as “the humanly devised constraints of formal and informal ‘rules of the games’ that shape societal transactions” (North, 1990). Institutional Theory suggests that “a country’s institutional environment affects firm boundary choices, because the
6 (Brouthers & Hennart, 2007, p. 405). In other words, the way MNEs do business in foreign markets, is determined by the host country’s environment and therefore the firm’s ability to adapt to this environment is crucial for it to succeed.
There are two types of institutions. First, the formal institutions which refer to the government structure and the legal and regulatory framework, including the execution and enforcement of this framework (North, 1990; Kim & Aguilera, 2016). Therefore, a country’s formal institutions are heavily influenced by the country’s politics and the way the rulers govern the country. Hereby, the distribution of power plays a crucial role and the incentives
and integrity of politicians and law enforcement in fact determine the quality of formal institutions. When formal institutions are weak, their purpose may be partially replaced by informal institutions. For example, in the absence of state enforced laws regarding property rights and contracts, religious precepts may impose standards of conduct on the actors
(North, 1991). Furthermore, Bologna (2017) finds that when formal institutions are inefficient, individuals may easier turn to corruption to get things done. This is in line with Kelman’s (2000) findings who states that when governments are inefficient and bureaucratic bribes may also contribute to useful business investments. In other words, when formal rules of the game lack, informal rules and constructs will replace them. Vice
versa, when informal institutions are insufficient, referring to social norms, behaviors and rules, they are likely to be replaced by formal institutions. (Guiso, Sapienza & Zingales, 2015). This is the case in smaller societies where informal rules and codes of conduct are sufficient to maintain order in the society and the members of the community behave accordingly to secure their place in the group. However, when the community grows, and its members
7 countries’ populations grow, formal rules and their enforcement are crucial to maintain order in society.
Second, informal institutions refer to the unwritten cultural rules with respect to
social behavior, language, education level and the country’s religion (North, 1991; Kim & Aguilera, 2016). As discussed above, formal institutions must be efficient and governed properly to prevent informal constructs to overtake them. If they do, the consequences are that there is no order and that society will not rely on the government and legal framework. As a result, other values and principles within society, such as religious views and cultural
traditions, may fill in the gaps. As religious values and beliefs may replace a weak legal framework, these are very powerful constructs (North, 1991). However, when this is the case, MNEs will face a large deal of risk and uncertainty. As opposed to efficient formal institutions, informal institutions are not enforced by law which means that MNEs cannot
rely on sufficient legal protection when doing business abroad. This may jeopardize their business operations and significantly increase costs associated to these operations. In contrast, when MNEs target foreign locations with the right set of institutions, this will enable them to minimize transaction costs (Kim & Aguilera, 2016). Minimizing costs positively affects profits and increases the achievability of profit targets. Hence, institutional
quality is an important characteristic in the MNE decision-making process of foreign location choice (Berry et al, 2010).
As formal institutions comprise of sets of formal rules, enforced by governments, culture consists of values and beliefs (Alesina & Giuliano, 2015). Guiso, Luigi, Sapienza, and Zingales (2006) define culture as “those customary beliefs and values that ethnic, religious,
8 attributes which create cultural distance include ethnicity, religion and social norms (Ghemawat, 2001).
When measuring cultural differences between countries, scholars have different
views on what is the best method. Hofstede (1980) was the pioneer in this area of social science and created an absolute measure of cultural difference, aggregated into one overall score. This method is contested by Drogendijk & Slangen (2006) who argue that since Hofstede’s study was conducted with data from 1967-1973, significant cultural changes happened throughout the world and therefore, the data on which the Hofstede dimensions
are based, are in fact outdated. However, according to Beugelsdijk et al (2018) national institutions change over time but tend to change into the same direction. Therefore, they support Hofstede’s (1980) view and argue that one overall score can be used, as the relative institutional distance will stay the same.
In summary, national institutions reflect the unique characteristics of a country’s identity and personality in all its complexities. Metaphorically, formal institutions can be expressed as a country’s rational ability and informal institutions may represent a country’s emotional capacity. However, similar to humans, these may overlap and influence each other as well and are continuously interrelated to each other. In addition, not all countries
understand each other or get along. They have different principles and different views of how the world works. Time may incur some change, but the essence is likely to remain the same over a long period of time.
9 2.1.2 Psychic distance
“Distance really matters” according to Rugman et al (2011). A key concept in the international business management field is cross-national distance, also referred to as
“psychic distance” and defined as “country-level differences that make it difficult for firms to identify and pursue business opportunities in the foreign market” (Kim & Aguilera, 2015, p. 115). These include differences in language, culture and political systems, (Kim & Aguilera, 2015), as well as economic, social, cultural and administrative differences (Horner et al, 2016; Berry et al, 2010; Ghemawat, 2001), and differences in religion, corruption, legal
framework and education level (Buckley & Casson, 2009). Derived from the institutional theory, one can state that psychic distance is the aggregate of institutional, both formal and informal, differences between countries as perceived by an individual (Magnani, Zucchella & Floriani, 2018). Brewer (2007) adds to this that perceived psychic distance depends on the
availability and accessibility of market information. For example, two countries may share a number of similar characteristics, such as political system, religion and education level, but due to difference in language, psychic distance may still be perceived high. In this case, sharing a common second language such as English, will in turn decrease the perception of psychic distance as it enables the transfer of information through communication. Therefore,
the level of information flows can be a good indicator for the level of psychic distance. In conclusion, psychic distance refers to the degree to which a firm is uncertain of the characteristics of the foreign market and the accessibility of market information is limited. As a result, the firm incurs additional risk in failing its foreign operation (Rugman et al, 2011; Brewer, 2007).
10 Psychic distance is considered one of the greater challenges within firms’ internationalization strategy (Berry et al, 2010; Beckerman, 1956, in Isenberg, 2009), because it reflects core differences between the home and host country which are ingrained
into society over generations that are not easy to change or overcome.
Liability of Foreignness
Risk and uncertainty arisen from psychic distance are referred to as the “Liability of Foreignness” (LoF) (Hymer, 1960). The LoF is defined by Rugman et al (2011, p. 757) as “the
impact of various forms of distance that explains why MNEs have difficulties operating in foreign markets, especially facing rivals not hindered by such distance”. LoF is a constraint which matters in succeeding in foreign countries and realizing the benefits of foreign operations (Kim & Aguilera, 2015). In other words, the LoF is the risk associated to being
foreign and unfamiliar with the host country’s specific characteristics and identity.
“The more familiar the firm’s managers are with a market, the more likely it is considered for entry” (Brewer, 2007, p. 6). To give managers insight in the impact of distance on various industries, Ghemawat (2001) created the CAGE (Cultural, Administrative, Geographic and Economic) Distance Framework. The framework identifies four dimensions
of distance; cultural-, administrative-, geographic- and economic distance. With respect to the institutional theory, cultural distance between countries is a result of differences between countries’ informal institutions, whereas differences between formal institutions result in administrative and political distance (Ghemawat, 2001).
According to Zhao, Luo & Suh (2004) market specific uncertainty is mainly caused by
11 language, corruption level and religion and are of significant influence as well. (Isenberg, 2009; Qian & Sandoval-Hernandez, 2016). Nevertheless, more traditional economic factors such as GDP, market size and wealth or consumer income should also be considered
(Ghemawat, 2001). However, there is no limit to the number and type of psychic distance dimensions, as there will be discrepancies between any country characteristic, large or small, when compared to another country. Therefore, scholars have not yet reached consensus regarding the number and type of dimensions to consider when assessing psychic distance (Hutzschenreuter, Kleindienst & Lange, 2016).
The results of Beugelsdijk et al (2018) suggest that cultural distance does not seem to affect the amount of capital firms invest. However, they do find that firms are less likely to expand to culturally distant locations. According to Jimenez and de la Fuente (2016) psychic distance attributes must be included when analyzing stimuli on FDI. They find that when a
larger number of MNEs from the same home country is established in the same host country, this positively moderates the negative effect of psychic distance and decreases the LoF to a certain degree. However, Jimenez and de la Fuente (2016) find that this moderation effect does not have an impact on language and religion stimuli which indicates that different institutional dimensions are susceptible to different moderation effects. In fact, some
moderation effects may not have an effect at all and others may only affect certain distance dimensions in a geographic region. This suggests that the opportunities, combinations and effects are endless.
Asmussen and Goerzen (2016) studied the “interregional liability of foreignness” and stress that LoF must be unpacked in cultural, institutional and regional components. They
12 location choice as opposed to geographic distance. In short, firms seek for host country characteristics to support and match their business model (Asmussen & Goerzen, 2016; Ghemawat, 2001). Even though relative geographic distance between countries is
decreasing due to technological inventions, institutional distance is still present (Ghemawat, 2001). Other types of distance worth stating are administrative and political distance. These represent differences in currencies, differences in legal framework and difference in political system and stability. When colonial ties exist, these differences are generally smaller, because more detailed knowledge of the host country is known (Ghemawat, 2001).
Rugman and Verbeke (2004) refer to the study of Ruigrok and Wagner (2003) who question the internationalization theory and the psychic distance premise particularly. They find that German firms prefer to enter more distant markets with large market potential, such as Asia and North America, with different language and culture, than smaller markets
with the same language (Austria, Switzerland). These findings suggest that psychic distance is less a driver than market potential for location choice. This is an important finding, because it undermines several theories, including the institutional theory. However, when it comes to market-seeking FDI, the main objective is to find profitable markets and create shareholder value (Dunning, 1998). Therefore, it is rather likely that firms seek out market
opportunities in terms of sales potential as these are the main predictors for maximizing profit. In addition, the research only includes one country, Germany, and one industry, manufacturing. Therefore, the results are not generalizable. Nevertheless, these findings strongly suggest that psychic distance and the LoF are taken more for granted when expected profit is high enough. Or in other words, when the rewards exceed the risks, the incentives
13 the effect of psychic distance and product image on the level of business relationships between the MNE and the foreign country by means of a standardized survey. The sample used was divers in terms of variety in country pairs (n = 35) and in terms of the level of
psychic distance and product image. They find that both psychic distance and product image negatively affect foreign business relationships. In other words, when psychic distance is large and when product image is bad, business relationships will be fewer and weaker. Brewer (2007) studied the effect of psychic distance in the specific case of Australia’s export to twenty-five potential host countries. In his research he proposes commercial, political,
historical (colonial), geographic and social ties as well as available country information and the level of development as components of psychic distance. Thereafter, he constructed a psychic distance index, hereby ranking the twenty-five countries and ranking the number of Australian exporters to each country. He finds that the lower the psychic distance, the more
Australian export there is to that country.
In summary, from a business perspective, psychic distance has many implications and may create a lot of boundaries for MNEs. When psychic distance is large, the incentives must be strong enough and the rewards large enough to put in the time, money and effort to overcome its effects. The following section explains why MNEs seek foreign direct
investment (FDI) opportunities and what the implications are of internationalization for both the MNE as the host country.
2.1.3 MNEs incentives for FDI
In this section the main concepts and theories regarding MNEs incentives for FDI will be
14 countries (Rugman & Verbeke, 2004; Kim & Aguilera, 2016). “MNEs are the key drivers of globalization, as they foster increased economic interdependence among national markets” (Rugman & Verbeke, 2004, p. 3). Hence, globalization enables international trade and
stimulates the economies of the participating countries. In contrast, globalization affects the choices of MNEs as well: “Forces of globalization drive firms to expand outside of their home market” (Brouthers & Hennart, 2007, p.395). In other to match their competitors’ profitability and market share, MNEs are constantly seeking efficiencies to minimize cost and maximize profit. This often leads to seeking operational locations to reduce cost and foreign
markets to reach consumer markets. As a result, there is a causal relationship when it comes to globalization and MNEs location choices. In other words, there is no globalization without MNEs and there are no MNEs without globalization as they are interrelated (Buckley & Casson, 2009). Due to technological innovations, with the internet invention as the main
driver, globalization has accelerated at a very fast pace (Ghemawat, 2003).
Moreover, from a host country-perspective, incentives to attract FDI exist as well. FDI contributes to economic growth by providing capital for economic development and introducing new technological knowledge and organizational practices. In addition, FDI operations increase the demand for workforce, hereby creating new jobs that have a positive
effect on society’s wealth. Subsequently, an increase in society’s wealth may lead to changes of the country characteristics over time.
In conclusion, globalization and MNEs are driven by each other, while the pace of their development is fueled by technology and knowledge and their geographic spread by the desire and ability of host countries to attract FDI. To determine the factors which influence
15 the location choice of an MNE, the incentives for FDI must be assessed first. In the literature, the following main schools of thought are mostly employed.
Internalization Theory
The first concept that will be discussed refers to Dunning’s (1998) Eclectic or OLI (ownership, location, internalization) Framework based on the internalization theory. This theory brings together components of both Transaction Cost Analysis (TCA), Resource Based View (RBV) and institutional theory, which will be explained in the proceeding sections.
“Ownership” refers to firm-specific advantages, “location” refers to institutional characteristics of the host country and “internalization” refers to minimizing transaction costs (Rugman & Verbeke, 2004). Hence, unstable institutional environments increase the costs of ownership in a foreign location (Makino et al, 2004).
The four main incentives to enter foreign markets are market seeking, resource seeking, efficiency seeking and strategic asset seeking (Dunning, 1998). From a market-seeking perspective, expanding sales and fighting against competitors are the main drivers, as the success and profitability of the firm depend on market demand (Dunning, 1998; Brouthers & Hennart, 2007; Buckley & Casson, 2009). Market-seeking incentives apply
mainly to consumer business companies, which are seeking new markets to sell their products to. The main incentive is acquiring new customers abroad to increase their global market share and increase shareholder value (Dunning, 1998; Buckley & Casson, 2009). Resource seeking stems from the Resource Based View and applies mainly to industrial companies. Resources may include raw materials and cheap labor (Brouthers & Hennart,
16 borders (Brouthers & Hennart, 2007). Therefore, when MNEs seek markets or resources, this will affect the location choice. When knowledge is transferred, patents and property rights come in place and the quality of these depends on the quality of the regulatory system
(Buckley & Casson, 2009). Therefore, Dunning (1998) also suggests that market structure, including the openness of financial markets, and government policies are components of potential locational advantages. Brouthers and Hennart (2007, p. 419) conclude: “Motives for foreign entry depend on the following; level of control; the industry and its characteristics (competition present and future), parent firm characteristics and characteristics of home
and host countries”.
Internationalization Theory
The second theory refers to the internationalization theory. This theory is conceptualized by
Johanson and Vahlne (1990) in the Uppsala model and suggests that firms will expand into foreign locations based on their incremental learning experience and their level of acquired knowledge along the way (Rugman & Verbeke, 2004; Brouthers & Hennart, 2007; Kim & Aguilera, 2015). Driven by “experiential market knowledge” firms will first enter foreign markets with which they are relatively familiar before capitalizing on that knowledge and
expanding into more foreign and unfamiliar locations, hereby increasing the acceptable risks associated with such ventures (Johanson & Vahlne, 1990; Kim & Aguilera, 2016). In this view, the firm is defined as “a bundle of capabilities and routines that develop over time as a result of organizational learning” (Kim & Aguilera, 2016). The Uppsala model focusses on the internal drivers and capabilities from within the firm, while other theories such as the
17 the firm. This division is important, as these two views can be considered the main views in the theory of location choice and FDI. Hereafter, the RBV and the TCA will be discussed.
Resource Based View
The third concept is the RBV. This theory is related to the internationalization theory. The RBV is a concept that explains the implications of the theory from the firm capabilities perspective (Brouthers & Hennart, 2007; Rugman & Verbeke, 2004). The RBV describes the incentives for firms’ foreign expansion as driven from within the firm and reflects on its
unique capabilities and resources which must be valuable, rare and for which no substitutes exist. In this view, the firm capitalizes its knowledge and capabilities to successfully expand its operations into foreign territory (Brouthers & Hennart, 2007). Firms’ decision to expand into foreign markets depend on a variety of factors, such as profitability of the parent firm,
growth perspective and how multinational the firm is. Other drivers include the level of R&D, available transportation channels, marketing opportunities and production levels (Buckley & Casson 2009; Ghemawat, 2003; Dunning, 1998). Technological improvements and innovations have increased the level of knowledge on a global level. This and the improved ability to transfer such knowledge between countries led to an acceleration of the
internationalization of MNEs (Buckley & Casson 2009; Porter, 1990; Ghemawat, 2003). Therefore, firms’ internationalization strategy is becoming increasingly important in a global business context (Isenberg, 2009; Zaheer & Nachum, 2011).
18 Transaction Cost Analysis
The fourth concept is TCA which suggests that firms will strive to minimize the level of uncertainty of entering a foreign market and hereby reducing the costs to incur (Brouthers
& Hennart, 2007). Uncertainty in this sense refers to the cost of the risk associated to expanding abroad. When the firm is less familiar with the host country, risk will increase due to information asymmetry between the managers of the firm and the potential local partners, which may result in opportunistic behavior of the latter (Brouthers & Hennart, 2007). To mitigate these risks, additional costs such as legal advice and translation of contracts are to
be incurred, referred to as information costs (Buckley & Casson, 2009). In short, information costs can be considered as the price to pay to enable the mitigation of risks associated to a business transaction. As a result, firms must make a trade-off between the transaction costs of the operation and the potential benefits of investing in the host country (Dunning, 1998;
Zhao et al, 2004). Subsequently, according to the Uppsala model, firms will choose to expand to markets with the least uncertainty to minimize information asymmetry and hereby limiting the transaction costs (Johanson & Vahlne, 1990). Both TCA and RBV support the internationalization theory as both are based on characteristics on the firm side and put less emphasis on the characteristics of the host country.
2.1.4 Market-seeking FDI
“One of the key decisions in the internationalization of a firm is the selection of the right country markets” (Brewer, 2007, p. 2). “Market-seeking strategies include; business strategies of expanding sales and fighting competitors versus strengthening relationships
19 new consumer markets to enter, several factors play a role in the selection process. The target country’s wealth and size are important factors to consider as it indicates whether the potential consumers have enough resources to afford the product as market-seeking FDI is
influenced by market size (Dunning 1998; Ghemawat, 2001; Habib & Zurawicki, 2002; Magnani et al, 2018). However, similarities and differences between the home and host country’s characteristics turn out to have a large effect on trade volumes (Ghemawat, 2001). According to Ghemawat (2003) the ability to transfer knowledge, speaking the same language, sharing the same border and having a friendly relationship with the host country,
have a positive effect on trade volumes. When selecting new markets, MNEs must make a tradeoff between the uncertainties of entering that market, the transaction costs, versus the market potential and return on investment which can be achieved when their activities are successful (Zhao et al, 2004). According to Dunning’s (1998) OLI Paradigm spending power
of the target market is the main driver of the market-seeking motivation of FDI. Therefore Dunning (1998) states that assessing whether the benefits of a foreign venture will exceed the costs is the main consideration to make for an MNE. Besides demand, cultural, legal and political environment are important factors when it comes to market selection (Rugman et al, 2011). However, when there is no demand from the target market for the products offered
by the MNE, there is no point in entering that market, even though the broad institutional environment is good. Or in other words: “When there is no demand for the product, the MNE is doomed to fail in that location” (Buckley & Casson, 2009, p. 1564). In conclusion, market size alone cannot predict the sales potential of a product as product demand depends on the consumer taste and preferences which varies between countries (Dunning, 1998), neither
20 2018). To achieve competitive success, “differences in national values, culture, economic structure, institutions and histories, all contribute” (Porter, 1990, p. 74).
In this paper the market-seeking incentive is explored. This means that I will study an
industry which is highly consumer oriented and is competitive for market share.
2.1.5 Corruption and institutional quality
One of the main attributes of administrative and political distance is institutional weakness (Ghemawat, 2001). In case of failing formal institutions, due to a weak legal framework and
inadequate enforcement of law, this will result in a higher level of corruption in the country [Ghemawat, 2001; Bologna, 2017). In fact, a weak legal system would be permissive of abuse of public office (Kwok & Tadesse, 2006). Corruption in this respect, occurs when formal institutions leave opportunity for government officials to use their position to unofficially
gain private benefits for themselves. Hereby, the misappropriation of government funds, intended for the public interest, to benefit from personally, is the central concept. Hence, in economic research corruption is most commonly defined as “the use/abuse/misuse of public office for private gain” (Tanzi, 1998; Treisman, 2000; Duanmu, 2011; Godinez & Liu, 2014;). Bribing is one of the components of corruption, which is defined as “dishonestly persuade
(someone) to act in one's favor by a gift of money or other inducement” (Soanes & Stevenson, 2005). Government officials’ purpose is to serve the public interest through their function. When corruption occurs, government officials abuse their function and power for their own interest instead of for the public interest for which it was intended. Besides bribing, government officials may manipulate information, participate in extortion and nepotism to
21 development and economic growth (Tanzi, 1998), as government officials are the ones with power, authority and privileges, which was held in trust for the public. Corruption is not in the public interest, as resources which should be attributed to benefit society, now disappear
in the pockets of corrupt government officials (Sandholt & Koetzle 2000).
To fight corruption, countries must implement rules and policies to address this problem. Hereby, it is important that a clear outline is provided of acts that are recognized as corruption within the national government as well as cross-border corruption between countries. The latter requires international laws and treaties enforced by law (Agbo &
Iwundu, 2016). Hereby, governments should be genuinely dedicated to address and fight corruption and implement appropriate consequences of participating in corruption. The punishment must be severe enough to discourage people, and the punishment must outweigh the expected benefit. If not, the risk will be perceived too low to prevent people to
participate in acts of corruption (Treisman, 2000). Cuervo-Cazurra (2006) examined the impact of corruption on FDI levels. They find that corruption results in relatively lower FDI from countries that have signed the Organization for Economic Cooperation and Development Convention. These findings suggest that international legislation of anti-corruption laws indeed prevent participating in anti-corruption in foreign countries. In addition,
when most high-ranking government officials are highly educated, this leads to them being more professional which and less corruptible (Treisman, 2007).
In the following sections, two corruption measures are introduced and explained which will be operationalized to formulate the hypotheses and test the data. The first, corruption level, refers to an absolute ranking per country, which expresses the level of
22 2018). The second, corruption distance, refers to the differences in corruption level ranking between country pairs, and may indicate the differences in institutional quality. Both corruption level and corruption distance are based on the Transparency International’s
Corruption Perceptions Index (CPI).
Corruption CPI
In the act of corruption, there are at least two parties involved of which one is a government official. Therefore, in fighting corruption, besides government dedication and cooperation,
creating public awareness is a crucial element. One of the organizations that contributes to such efforts, is Transparency International by issuing the Corruption Perceptions Index, an annually published ranking. This ranking is designed to encourage transparency and good governance and instigate government reform in corrupt countries. “Only where there is
freedom of expression, transparency in all political processes and strong democratic institutions, can civil society and the media hold those in power to account and corruption be fought successfully” (Ugaz, Chair of Transparency International, 2017).
Corruption is known to be an important component of institutional quality (Berdiev & Saunoris, 2018). Hence, “Corruption is a symptom of weak institutional quality and is
detrimental to economic growth” (Ugur, 2014, p. 3). Overall, findings suggest that corruption increases cost as it increases uncertainty. Corruption will increase the LoF and uncertainty will lead to additional costs of doing business which in turn may discourage foreign investors and FDI, leading to a detrimental effect on the economy and society (Lucke & Eichner, 2016; Habib & Zurawicki 2002; Cuervo-Cazurra, 2006). Although Mudambi, Navarro and Delios
23 contributes to economic growth and development, corruption has a negative effect on both and is detrimental for a nation’s wealth.
In contrast, according to Bologna (2017), it depends on the overall institutional
quality of the environment. Bologna (2017) argues that, from a competitive perspective, corruption will in fact lead to cost-reduction for businesses when the institutions in place are not efficient due to bureaucracy. “When the institutions in place are efficient, corruption is rendered unnecessary. Competition can thrive naturally on its own. However, when institutions are less conducive to competition, individuals begin to rely on corruption to
operate” (Bologna, 2017, p. 152). In international business, it is therefore not uncommon for MNEs to participate in corrupt acts. In fact, some MNEs consider it a routine aspect of their business operations, especially in developing nations (Barassi & Zhou, 2012; Tanzi, 1998). Other MNEs may feel pressured to engage in corruption in order to compete in emerging
markets where corruption is perceived a routine in doing business (Collins, Uhlenbruck & Rodriguez, 2009). In this respect, participating in corruption is needed to overcome the LoF and to enable the MNE to face (local) competitors for whom corruption is general practice. As a result, when corruption is considered routine practice, over time this will even further encourage MNEs to participate in bribery of government officials (Baughn, Bodie, Buchanan
& Bixby, 2010).
Besides overcoming inefficiency and the LoF, MNEs may participate in more self-serving corrupt activities as well. In this respect, bribes are paid to officials in order to surpass competitors and regulations with the purpose of achieving monopoly power (Tanzi, 1998). “The firm has an incentive to offer a bribe and obtain benefits to which it would not
24 (Cuervo-Cazurro, 2006, p. 808). It is unfortunate how corruption nowadays is perceived as a norm instead of an exception. Corrupt countries have in fact institutionalized corruption into a rather common transaction. Nonetheless, MNEs still make the strategic and
deliberated decision to provide FDI to these countries and to inevitably be involved in corruption. (Spencer & Gomez 2011).
Furthermore, Kelman (2000) states that the problems caused by corruption are related to the fact that people do not get the benefits that they deserve and therefore the relationship between people and their governments is negatively influenced. Hence,
corruption can be seen as a way to get things done when MNEs face bureaucratic obstacles which negatively affect their business operations. However, this perceived positive effect only holds for individual cases from the MNE perspective, as only the MNE and the corrupt official benefit from this transaction. In other words, nation-wide effects on the public
interest can only be negative, as funds are withdrawn from the public.
Moreover, when comparing corruption intensity amongst countries, the intensity of bribery appears to increase as GDP decreases (Svensson, 2005). Corruption is known to have a negative impact on multiple factors in society as it leads to unfair resource allocation and has a negative effect on businesses and how they perform (Sims, Gong & Ruppel, 2012).
These findings suggest that there is a negative relationship between the wealth of a country, the institutional quality and the level of corruption. Therefore, it can be assumed that corruption illustrates the outcome of formal institutions and is mainly impacted by the strength of the legal system and law enforcement (Berdiev & Saunoris, 2018). As a result, when legal framework and law enforcement are strong, corruption will be low and when
25 An example of government reform of formal institutions on the national level concerns Indonesia. Indonesia’s CPI score was 0,57 in 2002, making it one of the most corrupt countries in the world (Barassi & Zhou, 2012). In 2002, Indonesia established the
Indonesian Corruption Eradication Commission (Komisi Pemberantasan Korupsi [KPK]). This commission is an autonomous government agency and its purpose is to fight corruption on the law-enforcement side. Since its formation “the KPK has brought previously untouchable high‐profile perpetrators to jail, has recovered stolen assets, and enjoys a much higher degree of public trust and support than the other Indonesian law enforcement
agencies” (Schütte, 2012, p. 38). The 2017 CPI score of Indonesia is 3.7 (Transparency International, 2017) and significantly reflects the effectiveness of the KPK since 2002. Although a CPI score of 3.7 still indicates a high level of corruption, this is a significant improvement compared to its 2002 CPI score of 0.57. This is an important finding as it
suggests that when law-enforcement actively participates in anti-corruption actions, this does significantly reduce the level of corruption despite of the wealth of the country. However, although the legal framework and law-enforcement are the main components of institutional quality, their interpretation from a cultural perspective matter as well. “Legal culture is an atmosphere of social thought and social forces that determine how the law is
used, avoided or misused, in the absence of legal culture, the legal system will be powerless. Legal culture elements include opinions, habits, ways of thinking, and ways to react in leadership. This refers to the president, the officials of the country, as well as the law-enforcement officers that must be a role model for not violating the law themselves” (Nugroho & Raharjo, 2016). In this respect, institutional quality does not only include formal
26 institutions, but cultural elements as well. Therefore, the assumption can be made that institutional quality can indicate the corruption level in a country.
Corruption distance
Corruption distance is a component of psychic distance. It refers to the difference in corruption level between two countries. Some scholars stress that corruption distance impacts the location choices of MNEs as well (Duanmu, 2011; Cuervo-Cazurra, 2006; Ledyaeva, Karhunen & Kosonen, 2013; Qian & Sandoval-Hernandez, 2016). In this view, the
corruption level of the target market alone is not the only predictor anymore, the home country corruption level is equally important. MNEs from a home country where the same type of practices is accepted, will be more comfortable and experienced with accessing the channels of corruption in a corrupt host country. Hence, when corruption distance is low this
means that MNEs are more familiar with the institutional setting of the host country, and therefore be more willing to choose that location (Duanmu, 2011; Cuervo-Cazurra, 2006; Ledyaeva et al, 2013). In contrast, when institutional quality is high, MNEs are less inclined to target that host country. In practice this means that whether a country is highly corrupt or not, it will seek out a target market with the approximately the same corruption level.
(Duanmu, 2011; Cuervo-Cazurra, 2006; Ledyaeva et al, 2013; Qian & Sandoval-Hernandez, 2016). Not all MNEs will be discouraged by high corruption levels in the host country (Barassi & Zhou, 2012). As previously discussed, when MNEs have the intention to engage in self-serving corrupt activities, the chance of this being successful is larger in a corrupt country then in a non-corrupt country. In addition, when successful, the chance of not
27 larger. Therefore, corrupt host countries may even attract corrupt MNEs. “Investors that have been exposed to bribery at home may even seek countries where corruption is prevalent” (Cuervo-Cazurra, 2006, p. 807). Evidence is found that countries with high
corruption levels receive less FDI from countries with laws against bribery abroad, which are the largest sources of FDI, and more FDI from other countries with high corruption levels (Cuervo-Cazurra, 2006).
Findings suggest that investors are not only influenced by corruption in the host country, but also by the distance and the direction of the corruption (Godinez & Liu, 2015).
In their research Godinez and Liu (2015) introduce the concept of corruption distance. They used Latin America as the locational setting and compared countries pair-wise in terms of corruption distance and FDI. Home countries with low corruption invest significantly less in countries with high corruption. However, when both home and host country are considered
corrupt, this does not have a significant effect on FDI. This is a result of firms that are familiar with operating in highly corrupt countries have internalized the knowledge of dealing with corruption abroad and use it as a firm-specific ownership advantage (Godinez & Liu, 2015). Ledyaeva et al (2013) report similar findings. Their research focusses on the Russian region and find evidence that investors from corrupt countries systematically prefer to invest in
more corrupt countries in the Russian region. In contrast, for investors from low corrupt countries it seems problematic to invest in corrupt parts of Russia. This is in line with findings of Baughn et al. (2010). Driffield, Jones and Crotty (2012) examined firms’ motives to invest in a conflict location with inherently unstable political environments. They found that countries with weaker institutions and less concern about corporate social
28 opportunism and an ethics-averse approach. The corruption distance between the host and country of origin strongly affects investor behavior. As the difference between two countries increases, the likelihood of the two countries to do business decreases (Habib & Zurawicki
2002). This is in line with the research of De Beule and Duanmu (2012) when investigating Chinese and Indian acquisitions in the mining industry. Their findings showed that Chinese and Indian firms were more likely to expand operations in resource-rich countries with unstable political environments, poor rule of law, and deficient control of corruption. This can be strategically motivated as these companies invest in countries that are similar to their
own institutional background, such that they would have less competition and a better chance to succeed.
In conclusion, the level of corruption is heavily dependent on the attitude of government as government officials are the main enablers of corruption. Having strong laws
in place against the participation in corruption is one part of the solution, but the enforcement of these laws is equally important. This applies to both the MNE’s home country as to the host country. Overall, researchers perceive corruption as a detrimental phenomenon to economic development. However, from a business perspective, corruption can improve the competitive advantage of MNEs and therefore MNEs are willing to bribe and
hereby maximize profits. In such environments, not participating in corruption, may in turn have a detrimental effect on the MNEs business operations and continuity. In this respect, playing fair in a country where rules do not apply in return for bribes, these MNEs will not be able to survive and succeed. When selecting host countries to establish a subsidiary, an MNE will have to decide in advance whether it is willing and able to play “the rules of the
29 2.1.6 Religion and product demand
Religion has a very specific impact on MNE location choice, as it reflects the way society
perceives the world and therefore influences consumer behavior. As a result, religious views and beliefs may have a positive or negative attitude towards certain product types. As religion includes sets of life rules and mandate its followers to participate in society in a certain, acceptable way, it is utmost likely that consumer choices are heavily influenced by consumers’ religion. Therefore, international marketing strategies should put sufficient
effort towards investigating a country’s traditions, religious beliefs and culture before entering that market (Peñaloza, 2005). Hence, society’s attitude and opinion directly affect the successfulness of an MNE, depending on the type of product they bring to market. Hence, when psychic distance is large and when product image is bad, business relationships will
be fewer and weaker (Durand et al, 2016). In this sense, product demand is a way of consumer self-expression that is affected by the way life is perceived by the consumer (Aaker, 1999). Consumers create systems that make their life meaningful. Products which support and fit these systems will be demanded and consumers will identify themselves with these products (Fournier, 1998; Aaker, 1999; Kim, Han & Park, 2001). When consumers
identify themselves with certain products, this is part of social identification, and enforces the sense of belonging to a certain society (Kim et al., 2001).
In contrast, social customs also reflect what is not-acceptable and may place restrictions on certain behavior as well. These restrictions are based on the beliefs of society as a whole and prescribe that participating in such behavior is considered taboo (Akerlof,
30 community. This is a strong construct as social exclusion is detrimental in most societies. Therefore, when cultural and religious aspects of the target market are not properly considered, the MNE will fail to achieve its targets in that country. Hence, it can be stated that
religion has a direct effect on sales. In turn, sales are the main driver of profit. As other risks can be mitigated, the risk of being categorized as “infidel” brand, service or product is one that cannot be overcome and will indefinitely lead to the inability to generate profit through such consumer market.
Previous research suggests that religion plays a large role in society and the way
people behave within that society. Buckley and Casson (2009) state that religion influences the work ethic of the workforce. Therefore, the country’s religion matters when MNEs choose foreign markets as religion will influence the characteristics, attitude and ethic of the workers hired by the MNE (Buckley & Casson, 2009). The same applies to leadership as
values and religion shape managers’ leadership style and attitude which may affect their strategic decisions (Fry, 2005). Bento (1994) argues that in a work context religion or spirituality empowers employees to be more creative, honest, more resilient and compassionate human beings. In contrast, Konz and Ryan (1999) deny the existence of a relationship between religiousness and productivity. Conversely, the results depend on the
type of setting as well.
Due to the high embeddedness of religion in a society, religion can be used as a proxy for culture (Volonte, 2015; Benabou, 2008; Alesina & Giuliano, 2015; Paldam, 2008; Richardson, 2014; Saroglou et al, 2004;). Volonte (2015) uses the German and French language and the Roman-Catholic and Protestant religion to proxy culture in his research
31 difference in board-composition between the two areas. The French-Catholic part of Switzerland tends to form one-tier boards as opposed to German-Protestant companies who prefer two-tier boards. This leads to the assumption that language and religion affect the
effort of management in creating transparency regarding their business operations and strategy from a governance perspective. This is in line with Paldam’s (2001) findings which investigated the relationship between religion and corruption. Hereby, religion was also used to proxy culture and Catholics seemed to be significantly more corrupt than Protestants. Another remarkable and significant finding showed that Muslims are poorer
and more corrupt than Non-Muslims. To conclude, they find that religious diversity reduces corruption (Paldam, 2001, p. 404). This is in line with the study by Lucke & Eichner (2016), who find that religious diversity within a country has a positive effect on FDI and religious similarity indicates low quality institutions. What should be considered with respect to
Paldam’s (2001) research, is that most Islamic countries in the sample were poor. Therefore, the results may be biased by country wealth-effects which are unfairly attributed to Islam instead.
From a market-seeking perspective, MNEs from Muslim countries more likely tend to target host countries which are Islamic as opposed to host countries with different religious
views. Hereby, the shared perception of “brotherhood” and “sentiment” were the main attributes to these locational preferences (Richardson, 2014).
When reviewing the existing literature on the impact of religion on market orientation and internationalization strategy, research in this field turned out to be scarce. This is also stressed by Izberk-Bilgin (2012), who studied the attitudes of Islamic Turks
32 market choice of MNEs, it is surprising to note such a lack of research in this area. Izberk-Bilgin (2012) finds that from a religious conviction, certain brands in Turkey are conceived as “haram”. This means that consuming these products is considered taboo and reflects
unacceptable behavior. She refers to this as “consumer jihad”. However, it must be stated that the research of Izberk-Bilgin may be flawed as her sample is not representative. The sample only included people of a low socio-economic status whom may have different opinions and perceptions of certain brands as opposed to people of a higher socio-economic level.
In conclusion, the impact of religion on the successfulness of MNE operations and profitability, should not be underestimated. Especially the effect of religions which very specifically subscribe to certain rules and are strictly adhered to by its followers, should not be taken lightly. For MNEs seeking new markets, the religious attributes of that country are
crucial as these can make or break its market potential.
2.1.7 GDP per capita and consumer wealth
When it comes to market-seeking FDI, the main objective is to find profitable markets and create shareholder value (Dunning, 1998). Hence, MNEs will enter new markets when the
expected return is high enough. Therefore, it is rather likely that firms seek out market opportunities in terms of sales potential as these are the main predictors for maximizing profit (Brouthers & Hennart, 2007). This means that the profits must outweigh the transaction costs by the required rate of return. However, strategic asset seeking strategies and resource-based motivations are evenly common drivers (Dunning, 1998). Nevertheless,
33 MNE. However, economic distance such as GDP, is generally not studied in isolation, because the results may be more ambiguous compared to other distances (Hutzschenreuter et al, 2016). Although when measured as a difference in GDP per capita, economic distance can be
used to test whether there may be a positive moderation effect of host country wealth on corruption and market choice (Hutzschenreuter et al, 2016).
2.1.8 Tourism and national openness
The World Tourism Organization defines tourism as "traveling to and staying in places outside their usual environment for not more than one consecutive year for leisure, business and other purposes” (Bentum-Ennin, 2014, p. 25). Tourism receipts are an important source of GDP earnings for many low-GDP countries and island (Bentum-Ennin, 2014). The size of the tourism industry has a positive effect on cross-industry trade intensity, because
international visitors cause a higher consumption of certain products, even if these products are not favored by the host country’s society (Wong & Tang, 2011). Vice versa, when countries’ international trade increases, the openness of the country will increase, and positively affect international travel (Santana-Gallego, Ledesma-Rodriguez & Pérez-Rodríguez, 2011). Tourism in Indonesia, Malaysia and Singapore has a significant positive
impact on GDP growth (Purwomarwanto & Ramachandran, 2015).
Although tourism makes up for approximately 6% of world exports, tourism is surprisingly understudied in the economics literature (Poprawe, 2015) as well as the relationship between tourism and institutional indicators (Brau, Di Liberto, & Pigliaru, 2011). Poprawe (2015) studies the direct effect of corruption on tourism demand and finds
34 that corruption has a negative effect on tourism. When corruption increases, tourism decreases. She also finds that GDP growth has a positive significant impact on tourism.
For tourism to flourish, the countries institutional quality is an important factor as
well. By improving infrastructure and safety, more tourists can be attracted (Brau, Di Liberto, & Pigliaru, 2011; Purwomarwanto & Ramachandran, 2015). In that regards, it can be stated that tourism and institutional quality have a causal relationship. However, which components of institutional quality are affected by tourism, are understudied. Fourie, Rosello & Santana-Gallego (2015) find that the main tourist destinations are either of
Christian religion or Islamic religion. The concept of distance seems to matter more to Islamic, Hindu and Jewish tourists as they prefer to visit countries with the same religion. An explanation of this finding could be that these religions prescribe rather strict rules with respect to the consumption of foods and beverages. Visiting equal religion countries, makes
it easier for these tourists to find non-restricted eating facilities. Another finding concerns that tourists visit mainly countries with higher GDP as opposed to lower income countries (Fourie et al, 2015; Bentum-Innin, 2014). However, this contradicts other empirical findings which suggest that consumers separate their perception of a country’s economic stability and investment opportunity from their interest in traveling there as a tourist (Fullerton &
Kendrick, 2017, p. 270). In addition, with respect to price competitiveness, when the price level in the host country is higher than in the home country, this will have a negative impact on tourism (Fullerton & Kendrick, 2017). Considering these findings, one may expect that poorer, “cheaper” countries will attract more tourism as a result of price-competitiveness. As a result, smaller and poorer countries who succeed in getting the right impression across,
35 On a different note, tourism can be seen as ‘country branding’ and contributes to country reputation which is defined as: “the presence or absence of international legitimacy accrued to a certain nation” (Fullerton & Kendrick, 2017, p. 260). In fact, country reputation is related to the perceived psychic distance towards that country by an individual. In their research Fullerton and Kendrick (2017) find that country reputation positively moderates tourism, hereby tourism increases when country reputation improves. In turn, country reputation can be positively affected by the right marketing techniques (Purwomarwanto & Ramachandran, 2015; Fullerton & Kendrick, 2017).
When comparing a large number of the studies in this literature review (Purwomarwanto & Ramachandran, 2015; Bentum-innin, 2015; Poprawe, 2015; Santana-Gallego et al, 2011; Wong & Tang, 2011), it seems remarkable that the trend of expressing the tourism variable is in absolute arrivals. Subsequently, tourism arrivals are compared to
GDP figures and population size. In my opinion, it is not surprising that larger countries will experience a larger number of tourists, solely due to the capacity of the country in terms of size and space. A different approach is taken by Brau, Di Liberto, & Pigliaru (2011). They use GDP per Capita PPP (corrected for spending power in international dollars) and the proportion of GDP earned by tourism influx instead. Their findings suggest that all economic
opportunities, including tourism, are constrained by a country’s institutional quality.
2.2 Research gap
When reviewing the literature, several remarkable gaps were identified. The causes and consequences of corruption as well as its effect on MNE location choice have been studied in
