The barriers to informal financing: an examination of the influence of institutional distance on trade credit

The purpose of this paper is to analyse the effects of institutional distance on foreign-owned subsidiary development. In particular, a distinction between direct and indirect effects of formal and informal institutional distance is proposed and empirically tested. Based on a bespoke census database of all known foreign-owned subsidiaries in the Northwest of England a postal survey has been conducted. The results indicate that informal institutional distance does have a pronounced negative effect on the level of intra- and inter-organisational relationships and decision-making autonomy in foreign-owned subsidiaries. The direct effect of formal institutional distance seems to be less relevant, however, it is becoming significant when the interaction between formal and informal institutional distance is considered. The specific contribution of this study lies in the systematic and comprehensive investigation of the formal and informal institutional distance between home and host country and their effects on subsidiary development. It is one of the first studies to provide a theoretically sound investigation, based on new institutional economics and internalisation theory, of the interaction between formal and informal institutional distance in the context of foreign-owned subsidiaries.

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

PurposeTo reconcile the existing contradictory conclusions on the relationship between cross-border mergers and acquisitions (M&As) and innovation, this paper aims to propose a theoretical model of the impact of cross-border M&As on technological innovation and explore the moderating role of institutional distance from the perspective of springboard theory and new institutional theory.Design/methodology/approachThrough the use of the two-way fixed effect model and the U-test method, the authors test the hypotheses based on a sample of cross-border M&A events of Chinese manufacturing enterprises during the period from 2006 to 2019.FindingsThe research shows that there is an inverted U-shaped relationship between cross-border M&As and technological innovation. Furthermore, formal institutional distance moderates the inverted U-shaped relationship in such a way that it reaches its turning point at a smaller scale of cross-border M&As, and the inverted U-shaped relationship is steeper when formal institutional distance is relatively high. The informal institutional distance moderates the inverted U-shaped relationship in such a way that it reaches its turning point at a larger scale of cross-border M&As and the inverted U-shaped relationship is flatter when the informal institutional distance is relatively high.Originality/valueThe research conclusions integrate heterogeneous views of the existing research, further clarify the influence mechanism and boundary conditions between cross-border M&As and technological innovation, identify the different moderating roles of formal institutional distance and informal institutional distance and enrich the literature on knowledge transfer and recombinant innovation during post-merger integration.

This study examines multinational enterprises investing in China’s A-share market from 2015 to 2024 to explore the impact of institutional distance on localization decisions in the global marketing strategy of multinational corporations. It also analyzes the mediating role of managerial cognition and the moderating role of corporate political connections. The findings indicate that institutional distance has a significant positive impact on localization decisions. Specifically, the greater the institutional differences between the home and host countries, the more likely enterprises are to implement deep localization strategies to gain legitimacy and reduce operational risks. Managerial cognition plays a significant mediating role between institutional distance and localization decisions, with both managerial cognitive complexity and managerial cognitive centrality serving as significant mediators between formal institutional distance, informal institutional distance, and localization decisions. Corporate political connections further moderate this relationship. High-level corporate political connections amplify the positive impact of both formal and informal institutional distance on localization decisions, while low-level corporate political connections weaken it. This study develops a theoretical framework of “institutional distance - managerial cognition - localization decisions”, revealing the micro-mechanism by which institutional environments influence strategy through managerial cognition. It provides both a theoretical foundation and management insights for multinational enterprises seeking to optimize localization strategies in complex institutional environments.

Entrepreneurial initiatives by subsidiaries are greeted as well as contested. We examine the effect of institutional distance between the host country of a subsidiary and the home country of its parent multinational enterprise (MNE) on the resource support a subsidiary receives from the MNE for its entrepreneurial initiatives. Drawing on social exchange theory, and resource dependence theory, we argue that while informal institutional distance inhibits MNE resource support for initiatives, and formal institutional distance further exacerbates the subsidiaries' options, external embeddedness and reverse knowledge transfers may help subsidiaries bypass the negative effects of institutional distance and encourage MNE involvement in subsidiary initiatives. Using survey data from 429 foreign subsidiaries in New Zealand, and secondary data on formal institutional distance from the Worldwide Governance Indicators, the results from structural equation modeling provide support to our hypotheses. This study extends institutional distance, embeddedness, and subsidiary initiative research. Importantly, it contributes by demonstrating how contingencies such as dual embeddedness and (low) formal institutional distance can counterbalance the negative effects of informal institutional distance on subsidiary initiatives and MNE‐subsidiary initiative collaboration.

ABSTRACTInstitutional distance is the difference in institutional environments between a multinational company’s host country and its home country. This article explores the effects of formal and informal institutional distance (IID) on the innovation performance of Chinese multinationals with outward foreign direct investment (OFDI), as well as the moderating role of organizational learning in the relationship. The results suggested that a formal institutional distance (FID) paradox existed between the FID and OFDI firms’ innovation performance; the informal institutional distance inhibited the technology transfer from foreign subsidiaries to their parent companies and the growth of the parent companies’ innovation performance; exploratory learning can effectively attenuate the negative influence of IID on OFDI firms’ innovation performance.

Strategic fit and trade credit: evidence from China

Institutional distance and cross-border M&A performance: A dynamic perspective

In this paper we study how differences between institutional environments determine the choice between two alternative strategies firms apply to spur growth across borders: greenfield joint ventures and acquisitions. Building on recent and independent advances that advocate considering distance asymmetry and interactive effects in the institution-based view, we argue that higher positive formal institutional distance leads firms to prefer acquisitions, while we contend that greenfield joint ventures are more likely as a result of negative formal institutional distance. Furthermore, we propose the moderating effect of informal institutional distance to be contingent on the direction of formal institutional distance. We base this claim on the notion that the role informal institutions play is bigger in regulatory weaker environments as informal institutions fill formal institutional voids in such contexts while informal institutions are less decisive in regulatory more developed environments. Accordingly, we hypothesize that whereas informal institutional distance does not moderate the effect of positive formal institutional distance, it does substantially strengthen the effect of negative formal institutional distance. Analyzing a sample of 561 investments by 434 Emerging Market Multinationals into 44 countries, we find support for our hypotheses.

Purpose The purpose of this paper is to examine how colonization experience, length and recency in emerging market multinational enterprise (EMNE) home countries may influence the relationship between formal/informal institutional distance and EMNE equity participation in target firms across border. Design/methodology/approach The study uses panel data of combined measures of formal and informal institutional distance, as well as colonization experience and a variety of firm-level and country-level controls to conduct regression models. The data sample consists of 1,725 mergers and acquisitions (M&As) deals between 2001–2015 across different emerging markets. Findings The findings show that EMNEs are generally likely to choose higher equity participation when there is greater formal institutional distance between the home country and the target firm country, while equity participation is lesser when there is greater informal institutional distance. However, for EMNEs from countries that were colonized, the authors found that colonization experience, colonization duration and years since colonization play a significant role in altering how formal and informal institutional distance affects equity participation choices. Originality/value This study shows that EMNEs from formerly colonized countries approach cross-border M&As differently, interpreting institutional distance and institution-based view in unique ways. This study shows how postcolonialism shapes decision-making. The authors also extend existing frameworks, such as the liability of foreignness, by introducing colonization experience as an additional theoretical lens to understand institutional distance in acquisition decisions.

Cross-border mergers and acquisitions (CBMAs) have long been used as an important strategy for firms’ international strategic expansion. Thus, CBMAs have become an increasingly important approach utilized by a large number of firms in multiple regions across the globe. It has gained in popularity over the last few decades. However, the occurrence of CBMAs has grown dramatically in the last few decades, academic research on this type of strategic action has not kept pace with the changes. Though there is considerable research in the area, it is unfortunately fragmented, leaving gaps that need to be addressed. Herein, the researchers have scrupulously reviewed the relevant literatures which pledge strategic supports for firm performance following CBMAs strategy under cross-national distance. The relevant literature on this topic is also tabulated and grouped by institutional based view to indicate major findings. Most importantly, the study identifies gaps in the literature and highlight ten institutional distance factors that provide directions that influence on firm performance following CBMAs in different institutional settings in different countries because institutions vary across countries because of their path-dependent nature. It has influence on firm performance following CBMAs. It is a fast and direct way for firms in one country to acquire advanced strategic assets in another country in order to improve their competitive advantage. This study is an effort to discuss the institutional distance (ID) factors that could influence on firm performance following CBMAs. Using the institution-based view (IBV) as a theoretical lens, this study emphasizes on the impact of formal and informal ID factors on firm performance following CBMAs. The study argues that formal institutional distance (political, economic, political, administrative, and infrastructural) could positively affect acquiring firm performance, while informal institutional distance (cultural, demographic, knowledge, connectedness, and geographical) could negatively affect acquiring firm performance. So, favourable institutional distance is obviously important for firms in demonstrating positive performing following CBMAs.

In this study, we examine the relationship between contract types, institutional distance and operational performance in the context of cross‐border trade in the liquefied natural gas (LNG) industry. Drawing on the buyer–supplier long‐term relationships literature, we argue for a negative link between short‐term contractual agreements and operational performance. Further, drawing insights from institutional theory, we contend that a high level of formal and informal institutional distance between the origin (i.e. supplier) and destination (i.e. buyer) countries reduces operational performance. We also argue that formal and informal institutional distance mitigates the negative effect of short‐term contracts on operational performance. Finally, we draw on the role of ‘asymmetry in distance’ by examining the direct and moderating effect of both the relevance and direction of formal institutional distance. We test our assumptions using LNG global trade flows from 39 source countries to 44 destination countries over the 2008–2017 period (a total of 17,447 shipments). Our study extends our knowledge on the operational performance implications of buyer–supplier relationships and stresses the important role formal and informal institutional distance plays as a direct and moderating effect on this relationship.

While peer influences on trade credit decisions are well documented, prior studies have overlooked their asymmetric effects across providing and receiving trade credit. Using a comprehensive firm-level dataset from 2004 to 2023, we show that industry contagion significantly affects firms’ provision of trade credit but has limited impact on their receipt of trade credit. Moreover, supplier concentration significantly suppresses contagion in receiving trade credit, whereas customer concentration exerts little moderating effect in providing trade credit. Further analyses reveal that the constraining role of supplier concentration diminishes when firms possess strong institutional bargaining advantages. These findings extend research on peer influences by establishing the asymmetric nature of contagion in trade credit and by highlighting how vertical structural constraints shape firms’ responses to industry-wide pressures. This study also provides practical insights for managing trade credit strategies under both horizontal competition and vertical supply chain dependencies.

PurposeThe purpose of this paper is to utilize middle-range theorizing to examine whether a US manufacturer can leverage supply chain orientation (SCO) to garner responsiveness from a global supplier. To capture the interplay of macro-level institutional environments, the authors examine the moderating effect of institutional distance on the SCO–supplier responsiveness relationship.Design/methodology/approachPrimary survey data collected from US manufacturers are utilized to measure SCO and supplier responsiveness. Two secondary data sets (EIU and GLOBE) capture formal and informal distance at the institutional level and are used to test the moderating effect of institutional distance.FindingsThe research finds that SCO can facilitate global supplier responsiveness. A post hoc exploratory analysis reveals a three-way interaction, where the SCO–supplier responsiveness relationship is strengthened when formal and informal institutions are either very similar or very different.Research limitations/implicationsThe research offers a more nuanced understanding of manufacturer–supplier relationships in global supply chains by demonstrating how country-level (macro) characteristics can influence firm-level (micro) supply chain phenomena. It extends research on SCO by illustrating how institutional distance interacts with a manufacturer’s ability to leverage SCO to enable supplier responsiveness.Practical implicationsManufacturers should increase their attentiveness to institutional distance. When both formal and informal distances are different (i.e. high distance), SCO can create a powerful lever to improve global supplier responsiveness. Likewise, when formal and informal institutions are similar (i.e. low distance), SCO reinforces joint efforts and collaboration to create additive benefits, whereby suppliers are incentivized to be responsive to unexpected environmental changes.Originality/valueThis research addresses the growing call for more empirical studies that examine how country-level institutions influence firm-level phenomena. It also utilizes secondary data to serve as a proxy for formal and informal institutional distance.

The Trade credit policy design of suppiler has influenced the profits of the whole supply chain. This paper investigates the optimal supplier's trade credit decisions under two levels of trade credit within the EPQ framework. Then the optimal unit price and the length of the credit period is provided for the supplier to maxmize his profits by analysing the profits functions of the retailer and the supplier. Finally, examples and numerical analysis are given to analyse the effect of the end demand and the interest rate on the the optimal unit price and the optimal credit period.