Institutional distances, resources and entry strategies

Abstract

PurposeThe purpose of this paper is to examine the effect of institutional distances (IDs) on the choices of host country and the entry strategies, taking into account various firm resources.Design/methodology/approachInstitutions are quantified in terms of regulatory, normative, and cognitive aspects. Firm resources include technological and marketing resources, organizational slack, and internally generated and externally raised financial resources. The research context is foreign direct investments of Taiwanese listed firms in the electronics and computer industry from the year 2000 to 2007, which include 732 companies investing in 3,691 projects in 41 countries.FindingsThe tacitness of technological resources inhibits their transfer to distant countries. Marketing resources are more transferable to distant countries in terms of explicit regulative institutions. Organizational slack may weaken motives of firms in entering distant countries. Internally generated financial resources encourage risky investments in distant countries in terms of regulative institutions. Externally raised financial resources, due to their providers, restrict firms to finance risky projects in distant countries. High-control entry strategies are preferred to minimize appropriation risks regardless of funding sources. Involving local partners through a shared ownership provides institutional knowledge for foreign firms to mobilize local legitimacy in host countries. Firm resources directly and indirectly determine entry strategies through perceived IDs.Originality/valueThis study bridges the effect of firm-level resources and country-level institutions on the choices of host country and the entry strategies. It is among the first to quantify institutions in terms of their regulatory, normative, and cognitive aspects.