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The effect of institutional distance on multinational enterprise strategy

by Xu, Dean

Abstract (Summary)
This dissertation centers on a newly deveIoped concept in the Iiterature of institutional theory, institutional distance, in explaining the behavior of the multinational enterprise (MNE). Institutional distance is defined as the difference/similarîty between the regulative, cognitive, and normative institutions of two countries (Kostova, 1996). The fhmework of the dissertation involves multiple levels. The first part of the fiamework is mainly at the MNE parent firm level. I discuss factors that may have an impact on the MNE's choice of host country dong the dimension of institutional distance. These include the cornpetitive advantages of the MNE, its level of global integration, and its level of £irmdiversity. The second part focuses on the effect of institutionaï distance on subsidiary level MNE strategies, including entry mode, level of equity ownership, and expatriate strategy. in the third part, 1 develop the concept of host-country diversification strategy and examine the effect of institutional distance on this country-level strategy. Furthemore, the performance implications of institutional distance for the MNE are also discussed. Scott ( 1 995) defined the institutional environment in terms of three "pillars" - the regulative, normative, and cognitive domains. The regulative and nonnative dimensions are derived here based on two "factors" ("institutions" and " manage~nent'~) in the Global Competitiveness Report (World Economic Forum, 1997). Selected sub-items comprising these two factors are combined to form the regulative and normative scales, respectively. The two scales are then combined to tom a partial institutional distance measure in a way simiIar to Kogut and Singh's (1988) approach to deriving the cultural distance index. Hypotheses are tested utilizing a large-sample database covering thousands of Japanese foreign subsidiaries in over fifiy countries (Toyo Keizai, 1997). Statistical results indicate that some attributes of the parent finn may influence the MNE's preference for some host counûies over others and, once a host country has been chosen, the institutional distance of the host country will have an impact on MNE subsidiary level sîrategies, as well as MNE diversification strategy, in that country.The results dso suggest that a good "fit" of institutional distance and expatriate strategy can lead to higher subsidiary performance in the host country.
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Source Type:Master's Thesis

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Date of Publication:01/01/2001

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