IDEAS home Printed from https://ideas.repec.org/a/gam/jecomi/v10y2022i5p114-d815085.html
   My bibliography  Save this article

Formal vs. Informal Institutional Distances and the Competitive Advantage of Foreign Subsidiaries in Latin America

Author

Listed:
  • Henrique Correa da Cunha

    (Department of Global Management Studies, Ted Rogers School of Management, Ryerson University, 350 Victoria Street, Toronto, ON M58 2K3, Canada)

  • Mohamed Amal

    (Programa de Pós-Graduação em Administração (PPGAd), Universidade de Blumenau (FURB), Blumenau 89030-903, SC, Brazil
    Programa de Mestrado Profissional em Administração com foco em Gestão, Internacionalização e Logística (PMPGIL), Universidade do Vale do Itajai (Univali), Itajai 88302-901, SC, Brazil)

  • James Mark Viminitz

    (Department of Global Management Studies, Ted Rogers School of Management, Ryerson University, 350 Victoria Street, Toronto, ON M58 2K3, Canada)

Abstract

By focusing on the tacit and explicit characteristics of informal and formal institutional distances, this study investigates the competitive advantage of foreign subsidiary firms from developed countries and emerging markets operating in Latin America. Following recent research on distances in international management, this study measured the size and direction of distances and computed formal institutional distances based on the world governance indicators from the World Bank, whereas informal institutional distances are calculated using the four original dimensions of Hofstede. Considering that culture is tacit, whereas formal institutions are explicit, it is argued that these differences affect the ability to convert experience dealing with cultural and formal institutional conditions in the home country into firm specific advantages (FSAs) in a foreign host country. These assumptions are tested quantitatively using data from the Orbis database, a sample that includes over 4200 firm-year observations covering 10 of the largest economies in Latin America. In a departure from previous studies investigating the implications of FID direction, it is shown that the effects in specific directions are different for foreign subsidiaries from developed countries and from emerging markets. The results reveal that emerging market firms are at an advantage when operating in less developed host countries, whereas foreign subsidiaries from developed countries can adjust more positively when operating in host countries with strong formal institutions. On the other hand, the effects of the different CD dimensions depend on the direction towards host countries with specific cultural profiles. These findings indicate that foreign subsidiaries from emerging markets have a clear advantage in dealing with institutional voids in Latin America (i.e., FID towards less developed host countries), whereas the effects of CD are the same for all firms. This suggests that the cultural profile of the host country is what really matters.

Suggested Citation

  • Henrique Correa da Cunha & Mohamed Amal & James Mark Viminitz, 2022. "Formal vs. Informal Institutional Distances and the Competitive Advantage of Foreign Subsidiaries in Latin America," Economies, MDPI, vol. 10(5), pages 1-25, May.
    • Handle: RePEc:gam:jecomi:v:10:y:2022:i:5:p:114-:d:815085
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7099/10/5/114/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-7099/10/5/114/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Srilata Zaheer & Margaret Spring Schomaker & Lilach Nachum, 2012. "Distance without direction: Restoring credibility to a much-loved construct," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 43(1), pages 18-27, January.
    2. Jan-Erik Vahlne & Jan Johanson, 2017. "From internationalization to evolution: The Uppsala model at 40 years," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(9), pages 1087-1102, December.
    3. Azmat Gani, 2007. "Governance and foreign direct investment links: evidence from panel data estimations," Applied Economics Letters, Taylor & Francis Journals, vol. 14(10), pages 753-756.
    4. Ficici, Aysun & Wang, Lingling & Aybar, C. Bulent & Fan, Bo, 2014. "The Correlation between the Internationalization Processes and Performance of Firms: The Case of Emerging Market Firms of the BRIC Countries," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 1(1), pages 4-25.
    5. David A. Wernick & Jerry Haar & Shane Singh, 2009. "Do governing institutions affect foreign direct investment inflows? New evidence from emerging economies," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 1(3), pages 317-332.
    6. J Michael Geringer & Louis Hebert, 1989. "Control and Performance of International Joint Ventures," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 20(2), pages 235-254, June.
    7. Aysun FICICI & Lingling WANG & Bulent AYBAR & Bo FAN, 2014. "The Correlation between the Internationalization Processes and Performance of Firms: The Case of Emerging Market Firms of the BRIC Countries," Journal of Economics and Political Economy, KSP Journals, vol. 1(1), pages 4-25, September.
    8. Sascha Kraus & Tina Ambos & Felix Eggers & Beate Cesinger, 2015. "Distance and perceptions of risk in internationalization decisions," Post-Print hal-02011127, HAL.
    9. Shawna O'Grady & Henry W Lane, 1996. "The Psychic Distance Paradox," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 27(2), pages 309-333, June.
    10. Aysun FICICI & Lingling WANG & Bulent AYBAR & Bo FAN, 2014. "The Correlation between the Internationalization Processes and Performance of Firms: The Case of Emerging Market Firms of the BRIC Countries," Journal of Economics and Political Economy, , vol. 1(1), pages 4-25, September.
    11. Farok J Contractor & Sumit K Kundu & Chin-Chun Hsu, 2003. "A three-stage theory of international expansion: the link between multinationality and performance in the service sector," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 34(1), pages 5-18, January.
    12. Kraus, Sascha & Ambos, Tina C. & Eggers, Felix & Cesinger, Beate, 2015. "Distance and perceptions of risk in internationalization decisions," Journal of Business Research, Elsevier, vol. 68(7), pages 1501-1505.
    13. Jan Johanson & Finn Wiedersheim‐Paul, 1975. "The Internationalization Of The Firm — Four Swedish Cases 1," Journal of Management Studies, Wiley Blackwell, vol. 12(3), pages 305-323, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Niccolò Pisani & Joan Enric Ricart, 2018. "Offshoring Innovation to Emerging Countries: The Effects of IP Protection and Cultural Differences on Firms’ Decision to Augment Versus Exploit Home-Base-Knowledge," Management International Review, Springer, vol. 58(6), pages 871-909, December.
    2. Joonho Shin & Xavier Mendoza & Changbum Choi, 2022. "Do internationalizing business group affiliates perform better after promarket reforms? Evidence from Korean SMEs," Asia Pacific Journal of Management, Springer, vol. 39(2), pages 805-841, June.
    3. Isaac M Dinner & Tarun Kushwaha & Jan-Benedict E M Steenkamp, 2019. "Psychic distance and performance of MNCs during marketing crises," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(3), pages 339-364, April.
    4. Weber, Clarissa E. & Chahabadi, Dominik & Maurer, Indre, 2020. "Antecedents and performance effect of managerial misperception of institutional differences," Journal of World Business, Elsevier, vol. 55(1).
    5. Basu, Debarati & Mitra, Shabana & Purohit, Archana, 2023. "Does effective democracy explain MNE location choice?: Attractiveness to FDI and cross-border M&As," Journal of Business Research, Elsevier, vol. 167(C).
    6. Bruno F. Abrantes, 2020. "Are Neoclassic Internationalization Models Enduring? A Case-Review of the Uppsala Paradigm," SAGE Open, , vol. 10(2), pages 21582440209, June.
    7. Fonfara Krzysztof & Hauke-Lopes Aleksandra & Soniewicki Marcin, 2021. "Does Psychic Distance Still Matter? Empirical Evidence from Poland," Journal of Management and Business Administration. Central Europe, Sciendo, vol. 29(4), pages 32-56, December.
    8. Luíza Neves Marques Fonseca & Clarice Secches Kogut & Angela Rocha, 2023. "Anywhere in the World? The Internationalization of Small Entrepreneurial Ventures using a Social Media Platform," Management International Review, Springer, vol. 63(4), pages 673-696, August.
    9. Hamid Boustanifar & Edward J. Zajac & Flladina Zilja, 2022. "Taking chances? The effect of CEO risk propensity on firms’ risky internationalization decisions," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 53(2), pages 302-325, March.
    10. Eduardsen, Jonas & Marinova, Svetla, 2020. "Internationalisation and risk: Literature review, integrative framework and research agenda," International Business Review, Elsevier, vol. 29(3).
    11. Tang, Ryan W. & Buckley, Peter J., 2022. "Outward foreign direct investment by emerging market multinationals: The directionality of institutional distance," Journal of Business Research, Elsevier, vol. 149(C), pages 314-326.
    12. Mónica Clavel San Emeterio & Rubén Fernández-Ortiz & Jesús Arteaga-Ortiz & Pablo Dorta-González, 2018. "Measuring the gradualist approach to internationalization: Empirical evidence from the wine sector," PLOS ONE, Public Library of Science, vol. 13(5), pages 1-15, May.
    13. Georgios Batsakis & Vasilis Theoharakis, 2021. "Achieving the Paradox of Concurrent Internationalization Speed: Internationalizing Rapidly in Both Breadth and Depth," Management International Review, Springer, vol. 61(4), pages 429-467, August.
    14. Niittymies, Aleksi & Pajunen, Kalle, 2020. "Cognitive foundations of firm internationalization: A systematic review and agenda for future research," International Business Review, Elsevier, vol. 29(4).
    15. Wang, Qiu & Clegg, Jeremy & Mattos, Hanna Gajewska-De & Buckley, Peter J., 2023. "It’s personal: The emotional dimension of psychic distance perception in intercultural knowledge transfer," International Business Review, Elsevier, vol. 32(5).
    16. Cesinger, Beate & Hughes, Mathew & Mensching, Helge & Bouncken, Ricarda & Fredrich, Viktor & Kraus, Sascha, 2016. "A socioemotional wealth perspective on how collaboration intensity, trust, and international market knowledge affect family firms’ multinationality," Journal of World Business, Elsevier, vol. 51(4), pages 586-599.
    17. Oh, Chang Hoon & Kim, Minyoung & Shin, Jiyoung, 2019. "Paths and geographic scope of international expansion across industries," International Business Review, Elsevier, vol. 28(3), pages 560-574.
    18. Palmero, Alfredo Jiménez & Herrera, Juan José Durán & Sabaté, Juan Manuel de la Fuente, 2013. "The role of psychic distance stimuli on the East-West FDI location structure in the EU. Evidence from Spanish MNEs," Journal of East European Management Studies, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 18(1), pages 36-65.
    19. A. George Assaf & Alexander Josiassen & Haemoon Oh, 2016. "Internationalization and hotel performance," Tourism Economics, , vol. 22(3), pages 572-592, June.
    20. Liu, Yulong & Yu, Yang, 2018. "Institutions, firm resources and the foreign establishment mode choices of Chinese firms: The moderating role of home regional institutional development," Journal of Business Research, Elsevier, vol. 93(C), pages 111-121.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jecomi:v:10:y:2022:i:5:p:114-:d:815085. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.