The Primacy of Institutional Explanation of Chinese Outward FDI: Is It Understated or Overstated?

An institutional perspective has been increasingly adopted in recent studies to explain various aspects of internationalization activities of firms from emerging economies (Meyer & Peng, 2016; Peng, Wang, & Jiang, 2008), particularly China (Cui & Jiang, 2012; Morck, Yeung, & Zhao, 2008). Scholars often claim that the role of institutions in emerging economy firms’ internationalization is understated, hence more research is needed. In this commentary, which reflects on the intended contributions and theoretical and empirical issues of Buckley, Yu, Liu, Munjal, and Tao (2016), I aim to extend a discussion on whether and when such institutional explanations can be overstated. I focus on three issues: (1) conceptualization of institutions, (2) theorizing institutional effects, and (3) testing institutional effects. On each of these issues, I start by providing an overview of some common challenges in the literature. I then focus specifically on the paper as an illustration of how some of these challenges may be manifested. This is then followed by some recommendations for future research. Overall, I argue that pitfalls related to the conceptualization, theorizing and testing of institutional effects can lead researchers to overstate the institutional effects on firm strategic behaviors. These pitfalls can be avoided if researchers clarify the theoretical boundary of the institutional argument they adopt, properly model the institutional effects while taking into consideration other theoretically relevant constructs and mechanisms, and employ empirical design to overcome measurement errors and selection biases when testing not only the statistical significance, but also substantive (economic) significance of institutional effects.