Impact of institutions on cross-border acquisitions and mergers by Latin American firms: a gravitational approach

This study examines the impact of formal institutions on foreign direct investment. First, the quality (strength or weakness) of formal institutions in host countries is analyzed. Second, the absolute differences in the quality of formal institutions between the host and home countries are examined. The results show that (1) strong formal institutions in host countries positively influence FDI flows and (2) the larger the institutional distance between the home and host country, the lesser the FDI inflows. © 2009 Wiley Periodicals, Inc.

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.

The influences of a home country’s economic and political institutions on acquirers’ cross-border acquisitions (CBAs) ownership strategies remains unexplored. Acquirers face endogenous uncertainty (i.e., uncertainty that can be resolved in part by acquirers) when transferring headquarters resources to foreign target firms and exogenous uncertainty (i.e., uncertainty that cannot be resolved by acquirers) when there is an unpredictable policy change. We argue that well-developed economic and political institutions in a home country play a market-supporting and constraining role in mitigating endogenous and exogenous uncertainty respectively, enabling acquirers to seek high ownership stakes in CBAs. We also argue that the importance of a home country’s well-developed economic and political institutions for acquirers’ CBA ownership strategic decisions depends on mutual trade dependence between the acquirers’ home country and the target firms’ host countries and also on the economic capabilities of the acquirers developed in different industries and political capabilities developed in different host countries. To test these arguments, we analyze 133,623 CBAs between 2000 and 2020 and find support for the distinct roles played by a home country’s economic and political institutions.

The interplay between home and host country institutions in an emerging market context: Private equity in Latin America

Purpose - This study aims to examine the impact of host country institutions on the exit of foreign subsidiaries, and tries to figure out how the home country institutions moderate the relationship between host country institutions and subsidiary exit. Design/Methodology/Approach - The sample of this study includes 7,098 foreign subunits established by 2,401 Chinese listed manufacturing firms in 121 countries. This study used Logit Regression to measure the effect of home and host country institutions on the exit of foreign subsidiaries. Findings - The results show that when entering countries with better institutional profile than China, the host country institutions negatively affect the exit of Chinese foreign subsidiaries and home country institutions have positive moderating effect. While, when entering countries with worse institutional profile than China, the host country institutions positively affect the exit of Chinese foreign subsidiaries and home country institutions have no moderating effect. Research Implications - This study makes a new attempt to empirically examines the moderating effect of home country institutions on foreign subsidiary’s exit decision while being subject to the host country institutions, which helps fill the gap in this area. Moreover, this study offers a certain understanding of the impact of both home and host country institutions on the survival of foreign subsidiaries in host countries, which may be helpful for future policy development and firms’ internationalization strategy development.

PurposeThis study investigates how the degree of internationalization (DOI) affects the financial performance of emerging market companies by making the distinction between export intensity and multinationality (i.e. foreign direct investment). The authors argue that the different DOI-performance patterns in the literature relate to different internationalization approaches, which are moderated in distinct ways by formal institutions in the home country.Design/methodology/approachBased on data of Brazilian firms in several industries and with different internationalization patterns including 100 exporting firms and 30 multinational companies with varying degrees of multinationality over a period of five consecutive years, the authors test their hypotheses using an unbalanced panel data with 346 firm-year observations. In order to test how the quality of formal institutions moderate the DOI-performance relationships, the authors estimate the changes in the slope of the regression line by adding and subtracting one standard deviation to the Worldwide Governance Indicators (WGI) variables.FindingsA positive and linear association between export intensity-performance (EI-P) highlights the location specific comparative advantages of exporting Brazilian firms, while the multinationality-performance (M-P) relationship points to a horizontal S-shape pattern which conforms to the theoretical assumptions of the three-stage internationalization process. Formal institutions moderate positively the EI-P relationship, but moderate negatively each of the three stages of the M-P relationship.Research limitations/implicationsThe findings from this study provide critical insights that contribute to the ongoing debate on how formal institutions in the home country affect the DOI-performance relationship of emerging market companies (EMCs). However, the authors consider that it has limitations as they focused exclusively on formal institutions captured by governance institutions in the Brazilian context.Practical implicationsThis study provides relevant insights to managers and policy makers. Findings reveal that strong formal institutions in the home country make it easier (cheaper) for EMCs to invest abroad, and, at the same time, increase the efficiency of exporting firms and positively influence financial performance. Moreover, results show that during downturns in their domestic markets, multinational EMCs outperform domestic firms. In that sense, while policy makers can promote the internationalization and competitiveness of EMCs by implementing more supportive formal institutions, managers should consider a proactive approach and invest abroad when conditions in the home country are favorable.Originality/valueBy making the distinction between export intensity and multinationality this study contributes to the literature on the DOI-performance of EMCs providing a more nuanced view on how formal institutions in the home country moderate the EI-P and M-P relationships in different ways.

Purpose– The purpose of this paper is to examine the impact of quality of market supporting institutions (institutional quality) in host country and the similarities and differences of institutional quality between the home and host country (institutional distance) on subsidiary performance.Design/methodology/approach– Based on the conceptualization of new institutional economics, the authors divide quality of host country institutions into factor markets; product, capital, labor market and sociopolitical dimensions. The authors examine the impact of the quality these institutional dimensions in host countries and their difference between home and host country on the performance of 318 subsidiaries of 146 Korean listed manufacturing firms operating in 28 host countries from 2001 to 2006.Findings– The empirical results based on 1,129 observations show that institutional distance explains a significant variance in the subsidiary performance. In particular, the difference in quality of institutions in product, capital and labor market has negative impact on subsidiary performance. However, except for quality of regulation in labor market, host country institutional qualities do not significantly explain the variation in subsidiary performance.Originality/value– The evidence suggests that host country institutions matter substantially when considered with their relative similarity and difference with home country institutions. The impact of individual dimensions of institutions varies on subsidiary performance.

How do home country institutions influence cross-border postacquisition performance? We develop an institutional framework showing that informal and formal institutions not only have important individual effects but also work together in complex and interesting ways. While collectivism and humane orientation (two major informal institutions) can facilitate postacquisition integration and firm performance, shareholder orientation and property rights protection (two formal institutions) constrain postacquisition integration and firm performance. As acquirers are simultaneously embedded in their home countries’ informal and formal institutions, we further hypothesize that the positive effects of collectivism and humane orientation can be weakened by incompatible formal institutions that hamper postacquisition collaborative efforts. We find strong support for our hypotheses in a multilevel analysis of a sample of 12,021 cross-border acquisitions involving 43 home and target countries between 1995 and 2003.

Purpose Country institutions have become of heightened importance for firms’ international strategies in recent years. Herein, I review the reasons for the growing importance of institutional environments and examine how they influence the international strategies of multinational enterprises (MNEs). There have been significant changes in the global, economic and competitive landscapes in recent years. These changes are examined. Design/methodology/approach Three critical and interrelated changes in the global competitive landscape are identified. They include (1) more interconnected (interdependent) national economies, (2) a significantly larger number of multinational firms and (3) growing importance of emerging economies (and their MNEs). These changes have increased the importance of countries institutional environments. Country institutions, both formal institutions (codified and explicit rules and standards that shape behavior) and informal institutions (Shared norms that guide cohesive behaviors) are examined. I explain the influences of institutional complexity, institutional distance and geographic regions on firms’ international strategies. Findings Research has shown that both culture (informal institution) and formal institutions are interrelated and affect firms’ strategies. And, while specific institutions such as intellectual property protection (law and enforcement) are important, the collective influence of institutions has a critical influence on firms’ international strategies. And, institutions are multilevel (national, regional and local-municipal). The institutional complexity (combined effects of multiple institutions and their diversity) is carefully considered in executives’ strategic decisions. When firms consider entering a new foreign market, they also consider the institutional distance between the home and host countries. The differences in culture and in formal institutions compose the institutional distance and affect whether and how firms enter these markets. Greater institutional distance contributes to the liabilities of foreignness the challenges of which must be managed effectively to succeed in the new market. And the effects of institutional distance are asymmetric depending on whether the firm’s home country institutions are stronger/more developed or weaker/less developed than the host country institutions. Finally, many firms follow regional international strategies in which they invest in selected regions of the world. Recent research suggests firms enter regions that have attractive institutional profiles and engage in institutional arbitrage across the countries in those regions. Research limitations/implications This essay provides the base for additional research by identifying a number of important research questions on institutions and international strategy. Originality/value This essay highlights the importance of institutions for firms’ strategies. Understanding institutions and their influence contributes to more effective executives’ strategic decisions and more effective national and international policies.

This study examines the IJV partnership strategy from an institutional perspective. A firm entering a foreign country via an IJV can partner with (1) a local firm from the host country, (2) a firm from the same home country or (3) a firm from a different foreign country, i.e. a third country. Focusing on formal institutions (or regulatory institutions), we first conceptualized how institutional profile of the host country and institutional distance between the host country and the home country can determine the partner choice. Based on a large data set of 1373 IJVs, we then empirically show that foreign firms are more likely to partner with a firm from the home country or from a third country (compared to partnering with a local firm) when the host country institutions are stronger. We also find that foreign firms are more likely to partner with a firm from the home country (compared to partnering with a local firm) when the institutional distance between the host country and the home country is lower.

Manuscript type: Research paper. Research aims: This study aims to investigate the impact of insti- tutional distance between home and host countries on the choice of multinational enterprise’s (MNE) entry mode into Vietnam. Design/ Methodology/ Approach: Transaction cost theory was adopted to develop the hypotheses. The data of 82 MNE subsidiaries located in Vietnam were extracted from the World Bank Enterprise Survey. Probit regression was employed to estimate the impact of the institutional distance between home and host countries on the choice of the MNE’s entry mode. Research findings: The empirical results support the hypotheses, revealing that MNEs are more likely to enter Vietnam via acquisition investment rather than greenfield investment. This happens when both the formal and informal institutional distance between Vietnam and the home countries is large. Findings also suggest that the institutional distance between a host country with a transition economy and the home countries is an important element to take into account when MNEs decide to invest in a transition economy that contains high level uncertainties. Theoretical contributions/ Originality: The adoption of the trans- action cost theory enables this study to conceptualise the frame- work which is used to empirically test the effect of the institutional distance between Vietnam and home countries on the MNEs’ entry mode decision. This study shows that the transaction cost approach offers insights into how the institutional distance between the host and home countries affect the choice of the MNEs’ entry mode into a transition economy. This study contributes to international business literature by developing theoretical arguments about the role of the national institutional dissimilarities on the choice of the MNEs’ entry mode in a transition economy. Practitioner/ Policy implications: The implication drawn from this study is that MNEs investing through acquired subsidiaries are less burdened by environmental uncertainties since acquired subsidiaries offer more familarity with the  formal  institutions.  This  can  help the MNEs to establish a close relationship with the local partners  and the government. This also increases the MNEs’ cross-cultural communication and knowledge thereby, enhancing the investment. Research limitation: Further research should consider more parent firm characteristics so that implications for the MNEs’ entry strategy are developed. Given the role of the different managers at the different levels, future study should capture the perception of these managers who are based at the headquarters so as to further examine the effect of institutional distance.   Keywords: Formal Institutional Distance, Informal Institutional Distance, Entry Mode, MNE, Subsidiary, Transition Economy. JEL Classification: F23, M16

This paper evaluates factors that encourage or impede cross-border mergers and acquisitions in banking. The effects of bank specific features, as well as bank regulatory factors, from both target and acquiring banks' perspectives, are estimated. Three comprehensive databases are combined to provide a unique dataset to study cross-border merger and acquisition activities of banks. Banking sector regulatory variables included make this study among the first to empirically and comprehensively analyze the interrelationship between bank regulation and cross-border bank mergers and acquisitions. The results indicate that both bank characteristics and country specific characteristics are important determinants of banks' cross-border merger and acquisition activities.

PurposeDrawing on the institutional theory and organizational learning literature, the purpose of this study is to investigate the relationship between prior acquisition experience and the duration of the deal completion stage in cross-border acquisitions and the impacts of the quality of business institutions in the host country and the institutional distance between home and host countries on this relationship.Design/methodology/approachThis study uses the sixth wave of mergers and acquisitions, the first truly global wave that covered a wide range of institutional settings, to test the hypotheses. Using a panel data regression method, it analyzes 8,175 cross-border acquisitions from 2003 to 2009, conducted by acquirers from 47 advanced and emerging economies in 56 advanced and emerging economies.FindingsThis study finds that host-country acquisition experience has more impact on shortening deal completion duration. Home-country acquisition experience is more effective in host countries with less developed business institutions than in those with more developed ones. The results of this study show that the quality of business institutions in the host country and the institutional distance between the home and host countries amplify or attenuate the effect of past acquisition experiences, depending on their origin and the quality of business institutions and institutional distance of where they are used.Originality/valueThe growing popularity of cross-border acquisitions among emerging country acquirers calls for a systemic study of the cross-border acquisition process. One of the critical and less understood stages in this process is the deal completion stage. This study examines how the institutional environments in the home and host countries impact the effectiveness of past acquisition experiences on shortening this stage.

Mergers and acquisitions (M&As) are often dubbed as a market for lemons because of the extent of information asymmetry embedded in M&A transactions. A country’s institutional environment influences the quality and overall reliability of formal disclosures, thereby altering the extent of information asymmetry affiliated with an M&A transaction. We argue that the caliber of the host country's institutions—formal market-supporting institutions and the informal cultural institution of uncertainty avoidance—affects the public arbitration phase of M&A transactions, i.e., the phase in which firms attempt to resolve issues related to information asymmetry. We test our hypotheses using a sample of 3376 foreign acquisitions completed by U.S. firms between 2006 and 2016. Our results indicate that formal institutions lower arbitration duration. But, while high uncertainty avoidance lowers duration as expected for countries with low market-supporting institutions, it more strongly raises the duration for countries with high market-supporting institutions.

PurposeThis paper aims to reveal the influencing mechanism of the interaction between institutional environments in the home and host country on the accelerated internationalization of entrepreneurial enterprises from emerging economies (EE). The authors want to open the black box of home-country institutional environments’ moderating mechanism on the relationship between host-country institutional environments and accelerated internationalization.Design/methodology/approachThe authors chose a massive interview method and case study method to answer this question. According to our standards, the authors chose four high-tech companies in Guangdong and Guangxi provinces as case study samples. During investigation in the four case companies, the authors collected print data of 150 pages and electric data of 3 pages. Then, the authors excavated concepts in data through open coding, axial coding and select-type coding and identified concepts’ dimensions and connections between them.FindingsWell-developed home-country institutions can reduce the inhibitory effect of under-developed host-country institutions on the accelerated internationalization of entrepreneurial enterprises from emerging economies. Under-developed institutional environments in the home country are beneficial for entrepreneurial enterprises from EE to develop the institutional capability for entrepreneurial enterprises with stronger institutional capability from emerging economies. The inhibitory effect of under-developed institutional environments in the host country on their accelerated internationalization is weaker. The positive moderating role played by institutional voids in the home country on the relationship between institutional voids in the host country and the accelerated internationalization are mediated by the institutional capability of entrepreneurial enterprises from emerging economies.Research limitations/implicationsThe authors just refined the definition of institutional capability and divided its dimensions. Issues such as operationalization of institutional capability and the development of measurement scale are also worthy for future quantitative research. Considering the inherent defect of case study and that these four case companies are from Chinese high-tech industry, the external validity our research may be limited. The theoretical model that was constructed generally captured the relationships between dual institutional environments, institutional capability and EE entrepreneurial firms’ accelerated internationalization decision. Future studies may use a large-scale sample to verify the all propositions the authors introduced to draw more steady and reliable empirical study results.Practical implicationsThe conclusions have significant implications for governments in EE to construct friendly institutional environments for international entrepreneurship and for entrepreneurial firms to implement internationalization strategies.Social implicationsPolicy makers should establish well-developed normative and cognitive institutional environment by cultivating global-orientated and open national culture and organizing experience exchange conference, thereby speeding up the implementation of internationalization strategies and further improving international competitiveness for a country.Originality/valueFirst, the authors defined institutional capability as firms’ ability of establishing relationships with institution actors, adapting to institutional contexts, changing existing institutions or creating new ones to gain potential interests and suggested that it consists of three dimensions. Second, institutional voids in the home country positively moderate the relationship between under-developed institutional environments in the host country and the accelerated internationalization of entrepreneurial firms from EE. At last, institutional capability of firms negatively moderates the relationship between under-developed institutional environments in the host country and the accelerated internationalization of entrepreneurial firms from EE.