MNEs and the Duality of Institutions: Regulative Pressures, Social Responsibility Pressures and FDI

Abstract

Given the constant changes taking place in the international business (IB) landscape, a firm’s institutional environment is recognized as a key source of uncertainty. Addressing calls to explore how multinational enterprises (MNEs) strategize to manage complex institutional pressures, this paper examines the effects of institutional duality on entry mode choices. We explore how key institutions – both at home and abroad - affect MNEs’ foreign direct investment (FDI) decisions. In practice, country of origin still matters as MNEs seek to manage the pressures exerted by their host institutional environments, whilst also strategizing to maintain home market institutional legitimacy. Further, we propose and show that regulative and normative institutional pressures affect the choice of FDI mode differently. Using a sample of 44,881 FDI events between 2013 and 2019, we show that higher degrees of FDI such as wholly owned subsidiaries, tend to be used by MNEs when the distance between normative institutions, i.e., home and host CSR norms and practices, is high. Whilst regulative distance is managed through setting up joint venture relationships, wholly owned subsidiaries are chosen to control whether, and to what extent, MNEs adapt to different, host market CSR standards and practices.