Institutional distance and M&A ownership strategy: a perspective from emerging market multinational companies

(1)

Institutional distance and M&A ownership strategy:

a perspective from emerging market multinational

companies

Ziyi Liu S2975092 August 2018

University of Groningen Faculty of Economics and Business MSc International Business and Management

(2)

1

Abstract

Based on institutional theory, this study analyzes the ownership strategies of 438 companies located in the three largest emerging markets (China, India, and Brazil) investing in two developed regions (North America and EU enlarged) between 2014 to 2016. The previous research about the relationship between formal institutional distance and entry mode choices is partially confirmed through 5 regression models developed in this study. New results are discovered too that informal institutional distance has no effect on entry mode choices in the case of emerging market based firms entering developed markets. This study narrows the research gap of institutional theories by observing and analyzing emerging markets players, a group of firms which received limited attention from scholars in the past decades.

Keywords: institutional distance, entry mode choices, emerging markets,

(4)

3

Introduction

(5)

4

attempts to acquire local resources.

Institutions are the rules of the game in a society, the humanly devised constraints that shape human interaction (North, 1990). From larger organizations, such as countries, to relatively smaller ones such as firms, there are always structures, regulations, rules, and norms to govern the behavior inside the organizations ((North, 1990; Peng, 2003; Estrin et al., 2009). The extent of such difference between home country where the market expanding firms are based and host country where the market expanding firms aim to enter can be defined as institutional distance (Kostova, 1997). There are formal and informal institution distance. Formal institutional distance is the difference between the laws, regulations, political systems, etc. of home and host country due to different historical origins and different legal structure development (Beck et al., 2003). Informal institutional distance can be defined as the cultural, normative, and ideological differences between a firm's home and host country (Schwens et al., 2010). Formal and informal institutions reveal the investing environment of a country and have been tested to influence MNEs' choice of establishing and owning an oversea subsidiary. The dissimilarity between two institutional contexts, or i nstitutional distance, is the indicator of the potential obstacles against new foreign market entrants and exerts effect on both entry mode choice and subsidiary survival. Yiu and Makino (2002) pointed out that both formal and informal institutions exert influence on a MNE's entry mode choice and subsidiary ownership strategy in a host country. In a country with strong regulative, normative and cognitive institutions, a MNE prefer partial ownership over full ownership of its newly found subsidiary. Similarly, Dikova and Witteloostuijn (2007) found out a significant and negative relationship between the advancement of institutions and entry mode decisions and a positive relationship between the safety of institutional environment and the choice of partial ownership strategy. A well-established institutional environment appears to be attractive for new entrants to enter the new market through partial acquisitions and capable to provide enough protection for new entrants to take the risk of not fully controlling their new subsidiaries.

(6)

5

how high the distance is, multiple factors can moderate the impacts of institutions or have their own impacts on the choices of entry modes and ownership strategy of foreign entrants. Macroeconomic background, the technology intensity of parents, pressure from research and development, past domestic and international investment experience, profitability, and the relationship with suppliers all can determine the way a foreign entrants investing in a different context (Gedajlovic and Shapiro, 1998; Brouthers and Brouthers, 2000; Yiu and Makino, 2002; Estrin et al., 2009; Elango et al., 2013; Dikova and Sahib, 2013; Lo et al., 2016).

(7)

6

emerging market data was one main reason of this phenomena. However, emerging markets are becoming a major economic group during the decades development of institutional theories. The capital and resources flow in and out emerging markets in an incredible scale. Four (China, India, Russia and Brazil) out of the top 10 economies are emerging economies based on World Bank's PPP based GDP ranking. Emerging markets are too vital to be ignored. It will be interesting to test the proven institutional theories in the emerging contexts. This study is meant to answer the following questions: 1) What ownership strategy will MNEs from emerging markets take when they enter a developed country market? 2) What relationship does formal and informal institutional distance have with the ownership strategy of new entrants in developed institutional contexts and will it be the same as they do in emerging contexts? 3) Are there any external and/or internal elements able to influence such relationship? By answering these questions, this research can narrow the research gap of current studies from the opposite perspective, a shift from focusing on the foreign investments of developed market companies in emerging markets to focusing on the foreign investments of emerging markets companies in developed markets.

The article is structured as follows. In the next section, there is a more detailed review on institutional theory, entry mode choices researches and investor experience researches. Hypothesis will then be established based on these theories. Next, sample and data will be presented and methodology will be discussed as well. We will then forward to analyze the data to test the hypotheses. The results and conclusion will be presented, followed by the discussion and limitations of the article.

Literature Review

Institutional theory

(8)

7

(Lincoln et al., 1986; Kostova, 1999), exert different kinds of influence on the organizational practices (Hofstede, 1980; Kostova, 1999), and contribute to a stable, regulative, and meaningful society (Scott, 1995). Institutions constrain individuals and organizations in formal and informal methods. They can either be created and prohibit or promote artificially or be conventionalized naturally from traditions. Scott (1995 and 2008) introduces the concept of the three dimensions, or "pillars", of institutions: regulative, normative, and cognitive. The regulative pillar is the legal sanction that usually refers to the formal laws, regulations, standards, and governing rules formulated by governments or industries. Authorized power of the regulative pillar is the formal constraint to successfully govern a society. The normative and cognitive pillars, on the other hand, are the informal constraints. The normative pillar consists of social norms and values as the definitions of shameful or honorable behaviors and governs the society by defining good or wrong through the moral level. The cognitive dimension, mostly related to the specific culture, consists of the schemas, frames, and inferential sets that people use when selecting and ascribing meaning to information. Unlike the normative pillar, the cognitive pillar affects people by common cultural beliefs, understanding and supports. (Ahlstrom and Bruton 2006; Scott 2008)

Basically, institutions are the "rules of the game" (North, 1990; Peng & Khoury, 2009). A newly entrant of a market is required to understand the local "rules of the game" to transfer its competitive advantages to its new host environment and overcome the "liability of foreignness" which is the competitive disadvantage caused by the oversee business of an MNE's subsidiary that a local competitor would not incur (Zaheer, 1995; Estrin et al., 2009). External and internal uncertainties, advocated by transaction cost economics, can occur during the process of such transactions because of the failure of predicting future events and the lack of local information and insufficient experience and influence new entrants' entry mode decisions (Milliken, 1987; Williamson, 1991; Zhao et al., 2004).

Institutional distance

(9)

8

interact with the players in the markets, e.g. government and competitors (Delios and Henisz, 2002; Arslan & Larimo, 2011). Foreign firms from similar institutional environments are usually able to contact other players more easily than those from significantly different institutional environments. Such contacts usually guarantee the access to various resources such as the knowledge about local policies and local loan. This differences or similarities between home and host institutional environments is what we call "institutional distance" (Kostova, 1999). Institutional distance exists in both formal and informal institutions, individually and collectively. Institutional distance is revealed to affect different aspects of international business, including entry mode choices (Kogut and Singh 1988; Meyer et al., 2009; Schwens et al., 2010; Arslan & Larimo, 2011), foreign subsidiary establishment ((Kostova and Zaheer 1999), resources transferring (Bevan et al., 2004; Estrin et al., 2009), localization ((Kostova and Roth 2002; Peng et al.,2008), and foreign subsidiary performance (Zaheer and Mosakowski, 1997). Specifically, Schwens et al. (2010) collected questionnaires from German MNEs and found out empirical support for the influence of formal and informal institutional distance on entry mode selections by binary logistic regression analysis, despite the critics and debates on the methodology (Hoetker, 2007; Li and Meyer, 2009; Schwens et al., 2010). Estrin et al. (2009) obtained a sample of over 700 oversea investments happening between multiple host and home contexts. Their regression analysis proves the positive relationship between formal institutional distance and the tendency of greenfield investment and the results are valid on both new and experienced foreign investors.

Entry mode decision research

(10)

9

decisions. Kogut and Singh (1988), Brouthers and Brouthers (2000) and Larimo (2003) explained the choice between greenfields and acquisitions and Gatignon et al. (1988), Meyer (2001) and Brouthers (2002) investigated the similarity and difference between the entry mode strategies of services and manufacturing firms from an institutional perspective. However, transaction cost theory consider institutions along with other environmental aspects more as moderators than direct determinations (Yiu and Makino, 2002). The research on the relationship between institutional distance and entry mode choices is developed yet inconsistent. Formal institutions have been proved to affect the joint venture ownership among developed market MNEs expanding to transition economies (Malhotra et al., 2011). However, the lack of research based on the perspective of emerging markets and SMEs makes the results from current research not fully generalizable. There is limited evidence to prove the influence of institutional distance on entry mode choices.

(11)

10

case.

Investor experience research

The pros and cons of different entry modes in a institutionally distant context is enlarged on first-time foreign investors (Estrin et al., 2009). Experienced investors are able to acquire sufficient local resources and knowledge from their previous investment so the benefits of cooperating with local partners are reduced and the risks of misunderstanding and uncertainty by the lack of experience on local institutions is limited (Morosini et al., 1998; Zollo and Singh, 2004; Dikova and Sahib, 2013). International investment experience can influence the performance of new entrants not only on the establishment of their foreign subsidiaries but also on the survival of their new subsidiaries as Barkema et al. (1996) proved. Experienced investors are more flexible and adaptive to the contexts of their investments and capable of achieving a "dynamic equilibrium" more smoothly than first time entrants in the process of absorbing assets and resources in the new environment (Hitt et al., 1998). The effects international investment experience exerts on the relationship between institutions and entry modes has received empirical support. For example, Estrin et al. (2009) proves that, compared to first-time entries, subsequent entries are more likely to be greenfield investments when the formal institutional distance is high and Dikova and Sahib (2013) conclude that previous cross-border acquisition experience has a positive effect on the impact of informal institutional distance on foreign investments. Moreover, Elango et al. (2013) provides evidence that institutions and experience both influence foreign investment independently and interact with each other.

Hypothesis

Formal Institutional Distance

(12)

11

constraining some others. Some countries may share similar formal institutions but it is wise for a foreign firm to understand and prepare to adapt to the local laws and regulations if it plans to invest in another institutional context.

(13)

12

institutions to their home countries, it is understandable for these MNEs to choose to hold a high ownership of their newly established subsidiaries for the safety of their oversea assets. To sum up:

Hypothesis 1: For emerging market MNEs, formal Institutional distance is negatively related to foreign subsidiary ownership. The higher the formal institutional distance is, the less foreign subsidiary ownership the acquirers tend to have.

Informal Institutional Distance

A foreign company who acquires and completely controls a culturally distant subsidiary is likely to encounter administration issues. Managers may have to deal with the ambiguities in the relationship with unfamiliar organization structure and such ambiguities may cause misunderstanding or even conflicts in the process of cooperation (Barkema and Vermeulen, 1997; Barkema et al., 1996). It is a challenge to both foreign entrants and their local market subsidiaries to operate in the way that fits local culture to overcome the misunderstanding, ambiguous expression and trust crisis occurring in communication. Low ownership acquisitions, however, introduce local partners as a buffer between acquirers and markets when informal institutional distance is high since local partners usually have been accepted by the local market (Kostova and Roth, 2002; Arslan and Dikova, 2015). Such acceptance is essential for the foreign entrants to overcome the liability of foreignness and reduce operation costs in a new and culturally distant market.

(14)

13

distance and entry mode decisions are observed (Kogut and Singh, 1988; Kim and Hwang, 1992; Anand and Delios, 1997; Wilkinson et al., 2008). However, Tiyanhi et al. (2005) found no empirical support for the influence of informal institutional distance on entry mode decisions and Malhotra et al. (2011) mentioned a U shaped relationship between informal institutional distance and equity ownerships.

In the theory of Malhotra et al. (2011), a foreign company tends to choose high or whole ownership in markets with both high and low cultural distance, or informal institutional distance in our case, and partial equity ownership when the informal institutional distance is moderate. This U-shaped entry mode tendency happens because the low uncertainty from low informal institutional distance and the risks of misunderstanding from high informal institutional distance both increase the operating costs of partial ownership. On the other hand, the benefits of joint management outweighs the benefits of fully controlled management when informal institutional distance is moderate.

(15)

14

partners. Therefore, emerging market based investors turn to prefer partial ownership and search for joint ventures in the new markets with high informal institutional distance. When emerging market based companies invest in developed countries with high institutional distance, the analysis of Malhotra et al. (2011) suggests a preference of high subsidiary ownership for the investors. However, Dikova and Witteloostuijn (2007) proves that partial ownership is preferred when the host country possesses institutional advancement to the home country. The priority of emerging market based companies when they enter a developed market shift from avoiding institutional uncertainty to reducing transaction and learning costs with the help of local partners . To sum up:

Hypothesis 2: For emerging market MNEs, informal Institutional distance is negatively related to foreign subsidiary ownership. The higher the informal institutional distance is, the less foreign subsidiary ownership the acquirers tend to have.

International Investment Experience

Previous investment experience in the target countries can exert influence on the effects institutional distance have on foreign subsidiary ownership strategy. These investments provide parent companies experiences about local environment even the environment of the new acquisitions may not be exact the same as the one of the old ones (Barkema and Vermeulen, 1997; Elango et al., 2013). Experienced investors usually are acquainted to the local institutions such as local law system, social values, norms, and local organization structures.

(16)

15

1995), first time entrants prefer to choose partial ownership to get in touch with local partners and, more importantly, the local institutional knowledge and support resources behind these partners. Experienced entrants with previous operation in the target markets though obtained these knowledge and resources in the prior practices. This means the uncertainty and risks based on formal institutional distance are reduced and, consequently, the benefits of full subsidiary ownership start to outweigh those of joint ventures (Zaheer et al., 2013; Dikova and Sahib, 2013; Arslan and Dikova, 2015). In a foreign environment with distant informal institutions, previous operating experience helps parent companies to overcome local barriers set by local contexts and establish a system from information collection to information utilization (Very & Schweiger, 2001; Gaur & Lu, 2007; Arslan and Dikova, 2015). By taking advantage of this knowledge, experienced investors are able to discover easier and more efficient ways to acquire new assets than inexperienced investors (Demirbag et al., 2007; Puck et al., 2009).

Therefore, inexperienced foreign investors are tending to enter the new host market by partially owning acquisition in order to obtain the help of local partners overcome the disadvantage with limited local knowledge brought by institutional distance and get access to local resources while investors with previous oversea investing experience are tending to choose full ownership start-ups or acquisitions since the benefits from local partners are neutralized by their own knowledge. To sum up:

Hypothesis 3a: For emerging market MNEs, the international investment experience of parent companies moderates the effect formal institutional distance exerts on foreign subsidiary ownership.

Hypothesis 3b: For emerging market MNEs, the international investment experience of parent companies moderates the effect informal institutional distance exerts on foreign subsidiary ownership.

Methodology

(17)

16

To test the hypothesis, a sample with multiple home countries and multiple host countries is required. In the prior studies, the samples are either limited to a pattern of single home or single host country (Arslan, 2011; Tihanyi et al., 2005) or limited to a construct of developed home countries and emerging host countries (Estrin et al., 2009; Dikova and Witteloostuijn, 2007. Brouthers and Brouthers, 2001). Gedajlovic (1998) examined the constraint effect of institutions on subsidiary ownership dispersion in a cross-border context consists of five developed countries: the U.S., the U.K., France, Germany, and Canada. Brouthers and Brouthers (2001) proved the positive relationship between cultural distance and joint venture from a sample of 231 oversea investments from four developed markets located in western Europe and North America to five central and eastern European emerging markets, or transition economies by the definition of Edgar (1994). Similar conclusion is also drawn from the research of Dikova and Witteloostuijn (2007) under the same cross-border investment contexts. Yiu and Makino (2002) also proved the positive relationship between institutional distance and MNEs' tendency of choosing joint venture when they enter a new market from a sample consists of 10 Japanese MNEs. Estrin et al. (2009) and Elango et al. (2013) both inspected foreign investment targeting at multiple emerging markets and concludes the moderation effect of past international investment experience on the relationship between institutional distance and entry mode.

(18)

17

includes both full and partial cross border mergers and acquisitions, joint ventures, and cross abroad minority stake acquisitions to show the diversity of newly founded foreign subsidiary ownership. The sample only includes completed and completed assumed deals to guarantee the effectiveness of the sample. There are 585 deals that meet the criteria but due to a lack of information about the detailed ownership, a part of the sample is considered unusable and has to be excluded. The sample eventually includes 439 deals happened between 2014 to 2016.

Variables and Measurements

Dependent variable

The dependant variable of this study is the ownership of a host country firm that is acquired by a firm from the home countries in the merger and acquisition deals. To cover various ownership, three types of equity-based deals are included: acquisition, joint venture, and minority stake deal. The ownership data is downloaded from Zephyr database with the description of the deals, ranged from 100% to less than 0.1%.

Independent variables

The independent variables of the study are formal institutional distance and informal institutional distance.

(19)

18

between 2014 to 2016 is chosen as the measurement of formal institutional distance. The data is accessed through www.heritage.org.

Informal institutional distance reveals the differences in value and norm embedded social rules (North, 1990). A formula developed by Kogut and Singh (1988) based on Hofstede's national cultural indices is used in previous studies to measure informal institutional distance (i.e Chang and Rosenzweig, 2001; Tihanyi et al., 2005; Estrin et al., 2009). Four dimensions, including power distance, individualism, masculinity, and uncertainty avoidance, which are mentioned in Hofstede's study (2001) are calculated into the formula to measure the informal institutional distance between home and host countries. However, despite of being utilized for a long time, Hofstede's indices also face critics. Shenkar and Zeira (1992) and Barkema and Vermeulen (1997) criticized using countries as the units of identifying cultural distance is too simplified and fails to consider the interactions of different cultures beyond national borders. Lane (1989) questioned the surveys that Hofstede used may be insufficient to analyze complicated cultural characteristics such as culture diversity. Nevertheless, a large amount of literature provide relevant and consistent results about the relationship between informal institutional distance calculated based on Hofstede's indices and entry mode decisions (Barkema and Vermeulen, 1998; Chang and Rosenzweig, 2001; Kim and Gray, 2008; Estrin et al., 2009). These empirical evidences are persuasive enough to keep Hofstede's indices as the data source of the informal institutional distance of this article. The scores of each dimension of the home and host countries are recorded on the official website of Hofstede centre.

Moderators

(20)

19

2015; Gaur & Lu, 2007). Inexperienced companies are unlikely to seek for a full acquisition unless they have previous experience to achieve local knowledge and identify local players. The information about acquirers' foreign subsidiaries is gathered from Zephyr database.

Control variables

Four control variables are used, including: parent firm size, host country economic growth, and two industry dummies.

Parent firm size is measured by the net assets of the company. This indicator reveals a firm's availability to acquire resources which is vital to firm expansions (Schwens et al., 2010). A relatively large company usually has a large manufacturing or serving scale and higher potential value that can ease the difficulty to enter a foreign market (Burgel and Murray, 2000). However, only partial data is available for this sector hence separate discussion is necessary for this control variable. The data is accessed from Zephyr database and the unit of assets is in thousands of euros.

The GDP per capita growth from 2013 to 2015 is chosen to measure the economic growth of host countries. It is able to reveal the macroeconomic differences between home and host countries. GDP per capita is used in prior research to measure economic contexts and is proved as a valid measurement (Chari and Chang, 2009; Malhotra et al., 2009). The annual growth of each host country is accessed from World Databank and calculated into the total growth from 2013 to 2015. This period is the same as the time range of the sample.

(21)

20

might not be essential to achieve their expansion goals compared to other industries. Therefore, these two dummies are used to control the influence of industry differences.

Statistical models

Ordinary least-squares multiple regression analyses is performed to test the hypotheses. There are 5 models for this study. Model 1 includes control variables without firm size to demonstrate the effect of control variables on new subsidiary ownership. Model 2 includes firm size and other control variables, testing if firm size exerts significant influence on ownership. Model 3 is the full model including all independent and control variables to test hypothesis 1 and 2. Model 4 and 5 introduces international investment experience as a moderator interacted with ownership and formal and informal institutional distance to test hypothesis 3. IBM SPSS Statistics 24 is used to build the models and analyze results. The descriptive statistics and correlations of the variables are presented in Table 1. Low correlation coefficients and no significant co-linearity are detected through Pearson correlation and VIF values. A large portion of parent firms decide to choose full acquisition, meaning a ownership above 90%. This phenomena can be observed from the means of ownership, 78.1%. Institutional distance is correlated with subsidiary ownership and cultural distance shows very weak correlation with ownership. This phenomena is consistent with previous researches (Estrin et al., 2009; Arslan and Larimo, 2011), suggesting parent firms from emerging and developed markets tending to make similar decisions to parent firms from developed markets.

Results

(22)

21

Table 1. Descriptive statistics and correlation matrix

Table 2 reports the results of our regression analysis. All models have high F values and decent adjusted R square values which proves that these models represent the sample and are reliable. Model 1 and Model 2 examine control variables only and provide the base model for the research. There are two models because of the incompletion of firm size variable. Model 2 reveals that firm size measured by assets has no significant relationship with other variables. Therefore, firm size is not considered in the following models with the larger sample pool for the consistency of the sample. Economic growth is the most significant control variable which verify the influence of macroeconomic contexts on firm level operations. Firm size and service business shows negative but insignificant effects on foreign subsidiary ownership.

Mean S.D. 1 2 3 4 5 6 7 8 1.Ownership% .781 .345 1 2.Service dummy .340 .476 -.021 1 3.Hi tech dummy .180 .387 .071 -.329 ** 1 4.Economic Growth .032 .0344 .265 * * -.020 .109* 1 5.Firm Size*** 237071.60 630.254. -.021 -.103 .069 .014 1 6.Institutional Distance -.190 .049 -.313 ** .021 -.027 -.513** -.009 1 7.Cultural Distance 7.110 13.559 -.038 -.015 -.284 ** -.097* .122 -.242** 1 8.Int Inv Experience .65 .477 .087 -.125 ** .061 -.003 .033 -.049 -.154** 1

(23)

22

High technology business, on the other hand, shows insignificant, positive effect on foreign subsidiary ownership.

Model 3 tests hypothesis 1 and 2 that formal and informal institutional distance are both negatively related to foreign subsidiary ownership. The results provide sufficient results to support hypothesis 1: the negative Pearson value confirms the negative relationship and the regression model suggests the relationship significant. Meanwhile, hypothesis 2 is unsupported due to a slightly low significance. The low correlation between cultural distance and ownership also reveals the hypothesis is not supported. The results of Model 3 are not exactly identical as previous researches focusing on firms from developed markets investing in developing markets. Formal institutional distance shows similar effect on subsidiary ownership in two cases.

(24)

23

Table 2. Regression results

Model 1 Model 2 Model 3 Model 4 Model 5

t Sig. t Sig. t Sig. T Sig. t Sig.

(25)

24

Graph 1. Moderator effect on formal institutional distance and ownership

(26)

25

Graph 2. Moderator effect on informal institutional distance and ownership

Model 5 tests hypothesis 3b, the moderating effect of parent firms' international investment experience on the relationship between informal/cultural institutional distance and foreign subsidiary ownership. The moderating effect can be observed from Graph 2. The result of Model 5 is interesting. Individually, cultural distance appears to have no significant correlation with foreign subsidiary ownership. However, based on Graph 2, international investment experience leads to a negative relationship between informal institutional distance and subsidiary ownership. One explanation is that firms with experience care more about cultural sectors when expanding into the same or similar markets. First-time investors pay more attention on formal institutional part to avoid physical risks and uncertainty and can only experience cultural shock after their first investments.

Conclusion and Discussion

(27)

26

Johanson and Vahlne (1977) introduce the concept of "psychic distance" to analyze the influence of distance on international business management. Distance was then separately defined from the perspective of institutional theory by North (1990) and Scott (1995) and categorized into formal and informal institutional distance or three pillars: regulative, normative and cognitive institutions. Meanwhile, measurements were invented as well such as the research of Kogut and Singh (1988). Institutional distance may serve as both external and internal constraints from either the inside of a multinational firm or the cross border contexts this firm operates in (Gedajlovic and Shapiro, 1998). The effects institutional distance have on foreign direct investment was discussed frequently after the new century. For example, Yiu and Makino (2002) found empirical supports on the positive relationship between formal institutional distance and MNEs' tendency of investing abroad by joint ventures from a sample of over 300 investments by Japanese firms and Brouthers et al. (2002) observed similar phenomena from the investments of 500 European companies. Later, Dikova (2007, 2008), Estrin et al. (2009), Elango et al. (2013) and Arslan (2011, 2015) provide statistical evidence for the same positive relationship under the circumstances of developed market based firms investing in emerging markets and, as a plus, the moderation effect of previous international investment experience of the foreign investors. Lo et al. (2016) prove that the positive effect of formal institutional distance exerts on entry mode decisions applies on emerging market firms as well by analyzing 851 Taiwanese firms with foreign investment experience.

(28)

27

between informal institutional distance and entry mode decisions, the moderating effect of experience on the relationship is tested (Dikova and Sahib, 2013). The major limitations of previous researches on the interactions of institutions and entry modes are inconclusive and inconsistent theories on informal institutional distance and ignorance of emerging market based MNEs and their foreign investments although some of these firms are the top competitors in their respective fields and the economies behind them are playing a more and more important role in international business.

(29)

28

study provides empirical evidence to this negative and significant relationship between formal institutional distance (differences on law, regulations, policies, etc) and entry mode choices. Unfortunately, the relationship between informal institutional distance and entry mode choices is insignificant (differences on culture, social values, norms, etc.). This result is partially inconsistent with researches focusing on developed background parent firms investing in emerging markets. The relatively low cultural awareness might be a reason for this conclusion. Firms from emerging markets are aware of the existence of formal institutional obstacles but are not experienced enough to notice cultural differences. Emerging market firms may have to complement several foreign investment first to accumulate the knowledge and resources against cultural shocks. For the third question, emerging market companies' investment experience in developed markets is proved to be able to affect the relationship between institutional distance and foreign subsidiary ownership strategies. However, such moderating effect only significantly exists on the relationship between formal institutional distance and the entry mode choices of emerging market firms. Although evidence is observed that international investment experience can influence the relationship between informal institutional distance and entry mode choices of emerging market firms, it is hard to say the hypothesis on this moderating effect is supported when its condition, the relationship between informal institutional distance and entry mode choices, is still unclear. Hence, the third research question of the article is only half answered.

By answering these questions, this article contributes to the existing literature from a new perspective of focusing on foreign entrants coming from emerging markets entering well-developed markets. Current institutional theory regarding to formal institutions is to be consistent under our new circumstances with empirical evidence and the research gap among previous institution theories is narrowed.

(30)

29

(31)

30

References

Ahlstrom, D., & Bruton, G. (2006). Venture Capital in Emerging Economies:

Networks and Institutional Change. Entrepreneurship Theory And Practice, 30(2), 299-320. doi: 10.1111/j.1540-6520.2006.00122.x

Anand, J., & Delios, A. (2002). Absolute and relative resources as determinants of international acquisitions. Strategic Management Journal, 23(2), 119-134. doi: 10.1002/smj.215

Anderson, E., & Gatignon, H. (1986). Modes of Foreign Entry: A Transaction Cost Analysis and Propositions. Journal Of International Business Studies, 17(3), 1-26. doi: 10.1057/palgrave.jibs.8490432

Arslan, A., & Dikova, D. (2015). Influences of Institutional Distance and MNEs’ Host Country Experience on the Ownership Strategy in Cross-Border M&As in

Emerging Economies. Journal Of Transnational Management, 20(4), 231-256. doi: 10.1080/15475778.2015.1093784

Arslan, A., & Larimo, J. (2011). Greenfield Investments or Acquisitions: Impacts of Institutional Distance on Establishment Mode Choice of Multinational Enterprises in Emerging Economies. Journal Of Global Marketing, 24(4), 345-356. doi: 10.1080/08911762.2011.602323

Barkema, H., & Vermeulen, F. (1997). What Differences in the Cultural Backgrounds of Partners Are Detrimental for International Joint Ventures?. Journal Of

International Business Studies, 28(4), 845-864. doi:

10.1057/palgrave.jibs.8490122

(32)

31

Beck, T., Demirgüç-Kunt, A., & Levine, R. (2003). Law, endowments, and finance. Journal Of Financial Economics, 70(2), 137-181. doi:

10.1016/s0304-405x(03)00144-2

Bevan, A., Estrin, S., & Meyer, K. (2004). Foreign investment location and institutional development in transition economies. International Business

Review, 13(1), 43-64. doi: 10.1016/j.ibusrev.2003.05.005

Brouthers, K., & Brouthers, L. (2000). Acquisition or greenfield start‐up? Institutional, cultural and transaction cost influences. Strategic Management Journal, 21(1), 89-97. doi: 10.1002/(sici)1097-0266(200001)21:1<89::aid-smj85>3.3.co;2-# Brouthers, K., & Brouthers, L. (2001). Explaining the National Cultural Distance

Paradox. Journal Of International Business Studies, 32(1), 177-189. doi: 10.1057/palgrave.jibs.8490944

Brouthers, K., Brouthers, L., & Werner, S. (2002). Industrial sector, perceived environmental uncertainty and entry mode strategy. Journal Of Business

Research, 55(6), 495-507. doi: 10.1016/s0148-2963(00)00154-5

Brouthers, K., Brouthers, L., & Werner, S. (2003). Transaction cost-enhanced entry mode choices and firm performance. Strategic Management Journal, 24(12), 1239-1248. doi: 10.1002/smj.362

Brouthers, K., & Nakos, G. (2004). SME Entry Mode Choice and Performance: A Transaction Cost Perspective. Entrepreneurship Theory And Practice, 28(3), 229-247. doi: 10.1111/j.1540-6520.2004.00041.x

Burgel, O., & Murray, G. (2000). The International Market Entry Choices of Start-Up Companies in High-Technology Industries. Journal Of International

Marketing, 8(2), 33-62. doi: 10.1509/jimk.8.2.33.19624

Chang, S., & Rosenzweig, P. (2001). The choice of entry mode in sequential foreign direct investment. Strategic Management Journal, 22(8), 747-776. doi:

(33)

32

Chari, M., & Chang, K. (2009). Determinants of the share of equity sought in cross-border acquisitions. Journal Of International Business Studies, 40(8), 1277-1297. doi: 10.1057/jibs.2008.103

Chen, S., & Zeng, M. (2004). Japanese investors' choice of acquisitions vs. startups in the US: the role of reputation barriers and advertising outlays. International

Journal Of Research In Marketing, 21(2), 123-136. doi:

10.1016/j.ijresmar.2003.06.002

Delios, A., & Beamish, P. (1999). Ownership strategy of Japanese firms: transactional, institutional, and experience influences. Strategic Management Journal, 20(10), 915-933. doi: 10.1002/(sici)1097-0266(199910)20:10<915::aid-smj51>3.0.co;2-0 Delios, A., & Henisz, W. (2002). Japanese Firms' Investment Strategies in Emerging

Economies. SSRN Electronic Journal. doi: 10.2139/ssrn.305342

Demirbag, M., Tatoglu, E., & Glaister, K. (2007). Factors influencing perceptions of performance: The case of western FDI in an emerging market. International

Business Review, 16(3), 310-336. doi: 10.1016/j.ibusrev.2007.02.002

Dikova, D. (2009). Performance of foreign subsidiaries: Does psychic distance matter?. International Business Review, 18(1), 38-49. doi:

10.1016/j.ibusrev.2008.11.001

Dikova, D., & Rao Sahib, P. (2013). Is cultural distance a bane or a boon for

cross-border acquisition performance?. Journal Of World Business, 48(1), 77-86. doi: 10.1016/j.jwb.2012.06.009

Dikova, D., & van Witteloostuijn, A. (2007). Foreign direct investment mode choice: entry and establishment modes in transition economies. Journal Of International

Business Studies, 38(6), 1013-1033. doi: 10.1057/palgrave.jibs.8400297

Elango, B., Lahiri, S., & Kundu, S. (2013). How does firm experience and institutional distance impact ownership choice in high-technology

(34)

33

Estrin, S., Baghdasaryan, D., & Meyer, K. (2009). The Impact of Institutional and Human Resource Distance on International Entry Strategies. Journal Of

Management Studies, 46(7), 1171-1196. doi: 10.1111/j.1467-6486.2009.00838.x

Evans, J., & Mavondo, F. (2002). Psychic Distance and Organizational Performance: An Empirical Examination of International Retailing Operations. Journal Of

Gatignon, H., Anderson, E., & Helsen, K. (1989). Competitive Reactions to Market Entry: Explaining Interfirm Differences. Journal Of Marketing Research, 26(1), 44. doi: 10.2307/3172668

Gaur, A., & Lu, J. (2007). Ownership Strategies and Survival of Foreign Subsidiaries: Impacts of Institutional Distance and Experience. Journal Of Management, 33(1), 84-110. doi: 10.1177/0149206306295203

Gedajlovic, E., & Shapiro, D. (1998). Management and ownership effects: evidence from five countries. Strategic Management Journal, 19(6), 533-553. doi:

10.1002/(sici)1097-0266(199806)19:6<533::aid-smj957>3.0.co;2-#

Ghoshal, S., & Moran, P. (1996). Bad for Practice: A Critique of the Transaction Cost Theory. The Academy Of Management Review, 21(1), 13. doi: 10.2307/258627 Hennart, J., & Park, Y. (1993). Greenfield vs. Acquisition: The Strategy of Japanese

Investors in the United States. Management Science, 39(9), 1054-1070. doi: 10.1287/mnsc.39.9.1054

Hitt, M., Harrison, J., Ireland, R., & Best, A. (1998). Attributes of Successful and Unsuccessful Acquisitions of US Firms. British Journal Of Management, 9(2), 91-114. doi: 10.1111/1467-8551.00077

Hofstede, G. (1980). Culture and Organizations. International Studies Of

Management & Organization, 10(4), 15-41. doi:

(35)

34

Hofstede, G., Van Deusen, C., Mueller, C., & Charles, T. (2002). What Goals Do Business Leaders Pursue? A Study in Fifteen Countries. Journal Of International

Hoskisson, R., Eden, L., Lau, C., & Wright, M. (2000). Strategy in Emerging Economies. Academy Of Management Journal, 43(3), 249-267. doi: 10.5465/1556394

House, R. J., Hanges, P. J., Javidan, M., Dorfman, P. W. and Gupta, V. (Eds) (2004).

Culture, Leadership, and Organisations: The GLOBE Study of 62 Societies.

Thousand Oaks, CA: Sage.

Hoetker, G. (2007). The use of logit and probit models in strategic management research: Critical issues. Strategic Management Journal, 28(4), 331-343. doi: 10.1002/smj.582

Javidan, M., & House, R. (2001). Cultural acumen for the global manager. Organizational Dynamics, 29(4), 289-305. doi: 10.1016/s0090-2616(01)00034-1

Johanson, J., & Vahlne, J. (1977). The Internationalization Process of the Firm—A Model of Knowledge Development and Increasing Foreign Market

Commitments. Journal Of International Business Studies, 8(1), 23-32. doi: 10.1057/palgrave.jibs.8490676

Kiggundu, M., Jorgensen, J., & Hafsi, T. (1983). Administrative Theory and Practice in Developing Countries: A Synthesis. Administrative Science Quarterly, 28(1), 66. doi: 10.2307/2392387

(36)

35

Kim, Y., & Gray, S. (2008). The impact of entry mode choice on foreign affiliate performance: The case of foreign MNEs in South Korea. Management

International Review, 48(2), 165-188. doi: 10.1007/s11575-008-0010-3

Kogut, B., & Singh, H. (1988). The Effect of National Culture on the Choice of Entry Mode. Journal Of International Business Studies, 19(3), 411-432. doi:

Kostova, T. (1997). COUNTRY INSTITUTIONAL PROFILES: CONCEPT AND MEASUREMENT. Academy Of Management Proceedings, 1997(1), 180-184. doi: 10.5465/ambpp.1997.4981338

Kostova, T. (1999). Transnational Transfer of Strategic Organizational Practices: A Contextual Perspective. The Academy Of Management Review, 24(2), 308. doi: 10.2307/259084

Kostova, T., & Roth, K. (2002). Adoption of an Organizational Practice by Subsidiaries of Multinational Corporations: Institutional and Relational

Effects. Academy Of Management Journal, 45(1), 215-233. doi: 10.5465/3069293 Kostova, T., & Zaheer, S. (1999). Organizational Legitimacy under Conditions of

Complexity: The Case of the Multinational Enterprise. The Academy Of

Management Review, 24(1), 64. doi: 10.2307/259037

Larimo, J. (2003). Form of investment by Nordic firms in world markets. Journal Of

Business Research, 56(10), 791-803. doi: 10.1016/s0148-2963(02)00467-8

Leung, K., Bhagat, R., Buchan, N., Erez, M., & Gibson, C. (2005). Culture and international business: recent advances and their implications for future research. Journal Of International Business Studies, 36(4), 357-378. doi: 10.1057/palgrave.jibs.8400150

(37)

36

Li, P., & Meyer, K. (2009). Contextualizing experience effects in international business: A study of ownership strategies. Journal Of World Business, 44(4), 370-382. doi: 10.1016/j.jwb.2008.11.007

Lincoln, J., Hanada, M., & McBride, K. (1986). Organizational Structures in Japanese and U.S. Manufacturing. Administrative Science Quarterly, 31(3), 338. doi: 10.2307/2392827

Lo, F., Chiao, Y., & Yu, C. (2016). Network and Institutional Effects on SMEs’ Entry Strategies. Management International Review, 56(4), 531-563. doi:

10.1007/s11575-016-0289-4

Luo, Y. (1997). BEHAVIOR AND PERFORMANCE OF EMERGING MARKET MULTINATIONALS IN CHINA: REVIEW AND ANALYSIS. Academy Of

Management Proceedings, 1997(1), 185-189. doi: 10.5465/ambpp.1997.4981354

Luo, Y. (2001). Determinants of Entry in an Emerging Economy: A Multilevel Approach. Journal Of Management Studies, 38(3), 443-472. doi:

10.1111/1467-6486.00244

Malhotra, S., Sivakumar, K., & Zhu, P. (2011). Curvilinear relationship between cultural distance and equity participation: An empirical analysis of cross-border acquisitions. Journal Of International Management, 17(4), 316-332. doi: 10.1016/j.intman.2011.06.001

Meyer, K. (2001). Institutions, Transaction Costs, and Entry Mode Choice in Eastern Europe. Journal Of International Business Studies, 32(2), 357-367. doi:

Meyer, K. (2004). Perspectives on multinational enterprises in emerging

(38)

37

Milliken, F. (1987). Three Types of Perceived Uncertainty About the Environment: State, Effect, and Response Uncertainty. Academy Of Management Review, 12(1), 133-143. doi: 10.5465/amr.1987.4306502

Morosini, P., Shane, S., & Singh, H. (1998). National Cultural Distance and Cross-Border Acquisition Performance. Journal Of International Business

Studies, 29(1), 137-158. doi: 10.1057/palgrave.jibs.8490029

Morschett, D., Schramm-Klein, H., & Swoboda, B. (2010). Decades of research on market entry modes: What do we really know about external antecedents of entry mode choice?. Journal Of International Management, 16(1), 60-77. doi:

10.1016/j.intman.2009.09.002

North, D. (1990). Institutions, institutional change and economic performance. Cambridge, Mass: Cambridge University.

Pan, Y. (1996). Influences on Foreign Equity Ownership Level in Joint Ventures in China. Journal Of International Business Studies, 27(1), 1-26. doi:

Peng, M. (2003). Institutional Transitions and Strategic Choices. The Academy Of

Management Review, 28(2), 275. doi: 10.2307/30040713

Peng, M., Wang, D., & Jiang, Y. (2008). An institution-based view of international business strategy: a focus on emerging economies. Journal Of International

Peng, M., & Khoury, T. A. (2009). Unbundling the institution based view of international business strategy. In A. Rugman (Ed.), The Oxford handbook of

international business (2nd ed., pp. 256–268).NewYork, NY: Oxford University

Press.

(39)

38

Republic of China. Journal Of International Business Studies, 40(3), 388-404. doi: 10.1057/jibs.2008.56

Richard, O., Barnett, T., Dwyer, S., & Chadwick, K. (2004). Cultural Diversity in Management, Firm Performance, and the Moderating Role of Entrepreneurial Orientation Dimensions. Academy Of Management Journal, 47(2), 255-266. doi: 10.5465/20159576

Romanelli, E. (1989). Environments and Strategies of Organization Start-Up: Effects on Early Survival. Administrative Science Quarterly, 34(3), 369. doi:

10.2307/2393149

Scott, W.R. (1995). Institutions and organizations. Thousand Oaks, CA: Sage. Scott, W.R. (2008). Institutions and Organizations: Ideas and Interests. Thousand

Oaks, CA: Sage.

Schwens, C., Eiche, J., & Kabst, R. (2010). The Moderating Impact of Informal Institutional Distance and Formal Institutional Risk on SME Entry Mode Choice. Journal Of Management Studies, no-no. doi:

10.1111/j.1467-6486.2010.00970.x

Shenkar, O., & Zeira, Y. (1992). Role Conflict and Role Ambiguity of Chief Executive Officers in International Joint Ventures. Journal Of International

Stoelhorst, J. (2008). Why Is Management Not an Evolutionary Science?

Evolutionary Theory in Strategy and Organization. Journal Of Management

Studies, 45(5), 1008-1023. doi: 10.1111/j.1467-6486.2008.00774.x

Tihanyi, L., Griffith, D., & Russell, C. (2005). The effect of cultural distance on entry mode choice, international diversification, and MNE performance: a

(40)

39

Treviño, L., & Mixon, F. (2004). Strategic factors affecting foreign direct investment decisions by multi-national enterprises in Latin America. Journal Of World

Business, 39(3), 233-243. doi: 10.1016/j.jwb.2004.04.003

Very, P., & Schweiger, D. (2001). The acquisition process as a learning process: Evidence from a study of critical problems and solutions in domestic and cross-border deals. Journal Of World Business, 36(1), 11-31. doi:

10.1016/s1090-9516(00)00052-3

Wilkinson, T., Peng, G., Brouthers, L., & Beamish, P. (2008). The diminishing effect of cultural distance on subsidiary control. Journal Of International

Management, 14(2), 93-107. doi: 10.1016/j.intman.2007.08.003

Williamson, O. (1991). Comparative Economic Organization: The Analysis of

Discrete Structural Alternatives. Administrative Science Quarterly, 36(2), 269. doi: 10.2307/2393356

Yiu, D., & Makino, S. (2002). The Choice Between Joint Venture and Wholly Owned Subsidiary: An Institutional Perspective. Organization Science, 13(6), 667-683. doi: 10.1287/orsc.13.6.667.494

Zhao, H., Luo, Y., & Suh, T. (2004). Transaction cost determinants and ownership-based entry mode choice: a meta-analytical review. Journal Of

Zollo, M., & Singh, H. (2004). Deliberate learning in corporate acquisitions: post-acquisition strategies and integration capability in U.S. bank

mergers. Strategic Management Journal, 25(13), 1233-1256. doi: 10.1002/smj.426

(41)

40

Zaheer, S. (1995). Overcoming the Liability of Foreignness. Academy Of

Management Journal, 38(2), 341-363. doi: 10.5465/256683

Zaheer, S., & Mosakowski, E. (1997). The dynamics of the liability of foreignness: a global study of survival in financial services. Strategic Management

Journal, 18(6), 439-463. doi:

Institutional distance and M&A ownership strategy: a perspective from emerging market multinational companies