To Ally or to Acquire Abroad? The Contingent Effects of Institutional Distance

Abstract

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.