The direction of regulatory institutional distance and MNE’s subsidiary ownership strategy: Re-examining theory and evidence in the case of emerging markets

Abstract

The possibility of institutional distance exerting an asymmetric effect on the entry strategies of multinational enterprises (MNEs) has attracted recent scholarly attention. In this context, we re-examine the relationship described by Hernandez and Nieto (2015) on the effect of the direction of regulatory institutional distance on MNEs’ choice of entry mode in host countries. We extend this research by (1) focussing on the context of emerging markets and (2) accounting for a greater variety of MNEs as well as institutions by including both large and small firms, and a larger set of home and host countries. In contrast to Hernandez and Nieto’s study, we find that, in the context of emerging markets, institutionally distant MNEs are more likely to choose the full-ownership mode when they originate from an institutionally stronger country in comparison to the host (emerging) country, and they are more likely to choose the joint-ownership mode when they originate from an institutionally weaker country. We discuss our findings with respect to Hernandez and Nieto’s study, which explores this relationship more generally (i.e. beyond emerging-market contexts), however in the context of small and medium enterprises.