The Effect of Institutional Distance on FDI Strategies: Co-integration and Decomposition Effects

Abstract

Research on institution suggests that different institutions influence a firm’s foreign investment decision. However, FDI decisions are not homogeneous across all investment decision making stages, but rather they represent a set of sequential decisions. In addition, institutional distance (between home and host countries) has unique influences in different decision stages. By integrating regulatory, cognitive/cultural, and normative institutional distance and decomposing FDI decisions, our research suggests that the co-integration of institutions and decomposition of FDI strategies help us have a better understanding of the sequential decision making process. Specifically, regulatory institutional distance influences the decision of whether MNEs will invest in the host countries (the when question); cognitive/cultural institutional distance affects the decision of whether MNEs will build local partnerships (the who question); and normative institutional distance determines whether MNEs want to invest with majority or minority ownership (the how question). Importantly, we find the effects of institutional distance persist: regulatory, cognitive/cultural, and normative institutions dominantly influence the sequential investment decisions in configurational and composite manners.