Country Institutional Differences and Multinational Advantage in Banking

In this paper, we seek to answer the following questions : "Do country-level institutional differences affect benefits of multinationality? If so, how?" Focusing on resource and knowledge transfers as the key source of multinational advantage, we argue that the degree to which multinationals can benefit from such transfers depends on the extent to which knowledge or other resources are applicable across units. We further argue that the greater the institutional similarity across differrent countries in which the MNE is present, the greater the applicability and transferability of resources across its units. Hence, we claim that the greater the institutional similarity, the greater the firm performance and, further, the greater the effect of multinationality on performance. We test these arguments in a sample of 85 multinational banks using data from 2001-2002. We find that (1) institutional similarity significantly improves MNE performance, (2) multinationality does not have an independent effect on performance, and (3), contrary to our expectation, the positive effect of institutional similarity actually decrease with increasing levels of multinationality.