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How does regional institutional complexity affect MNE internationalization?

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Abstract

International business research is only beginning to develop theory and evidence highlighting the importance of supranational regional institutions to explain firm internationalization. In this context, we offer new theory and evidence regarding the effect of a region’s “institutional complexity” on foreign direct investment decisions by multinational enterprises (MNEs). We define a region’s institutional complexity using two components, regional institutional diversity and number of countries. We explore the unique relationships of both components with MNEs’ decisions to internationalize into countries within the region. Drawing on semiglobalization and regionalization research and institutional theory, we posit an inverted U-shaped relationship between a region’s institutional diversity and MNE internationalization: extremely low or high regional institutional diversity has negative effects on internationalization, but moderate diversity has a positive effect on internationalization. Larger numbers of countries within the region reduces MNE internationalization in a linear fashion. We find support for these predicted relationships in multilevel analyses of 698 Japanese MNEs operating in 49 countries within 9 regions. Regional institutional complexity is both a challenge and an opportunity for MNEs seeking advantages through the aggregation and arbitrage of individual country factors.

Abstract

La recherche en management international commence à développer une théorie et des preuves mettant en relief l’importance des institutions régionales supranationales pour expliquer l’internationalisation des entreprises. Dans ce contexte, nous proposons une nouvelle théorie et des preuves concernant l’effet de la « complexité institutionnelle » d’une région sur les décisions d’investissement direct à l’étranger des entreprises multinationales (EMN). Nous définissons la complexité institutionnelle d’une région en utilisant deux composantes, la diversité institutionnelle régionale et le nombre de pays. Nous explorons les relations uniques des deux composantes avec les décisions des EMN de s’internationaliser dans les pays d’une même région. En nous appuyant sur les recherches menées sur la semi-globalisation et la régionalisation ainsi que la théorie institutionnelle, nous postulons une relation en forme de U entre la diversité institutionnelle d’une région et l’internationalisation des EMN : une diversité institutionnelle extrêmement faible ou forte a des effets négatifs sur l’internationalisation, mais une diversité modérée a un effet positif sur l’internationalisation. Des nombres plus grands de pays dans une région réduisent l’internationalisation des EMN de façon linéaire. Ces relations prédictives sont validées par le biais d’analyses multi-niveaux effectuées sur un échantillon de 698 EMN japonaises opérant dans 49 pays dans 9 régions. La complexité institutionnelle régionale constitue à la fois un défi et une opportunité pour les EMN qui recherchent des avantages par l’agrégation et l’arbitrage de facteurs spécifiques aux pays.

Abstract

La investigación en negocios internacionales está apenas comenzando a desarrollar teoría y a evidenciar la destacada importancia de las instituciones regionales supranacionales para explicar la internacionalización empresarial. En este contexto, ofrecemos una nueva teoría y evidencia sobre los efectos de la “complejidad institucional” de una región en las decisiones de inversión extranjera directa por parte de las empresas multinacionales (EMN). Definimos la complejidad institucional de una región usando dos componente, la diversidad institucional regional y el número de países. Exploramos las relaciones únicas de ambos componentes con las decisiones de multinacionales de internacionalizarse en los países de la región. Con base en la investigación en semiglobalización y regionalización y en teoría institucional, postulamos una relación en forma de U invertida entre la diversidad institucional de la región y la internacionalización de la multinacional: la diversidad institucional en la región extremadamente baja o alta tiene efectos negativos en la internacionalización, pero una diversidad moderada tiene un efecto positivo en la internacionalización. Un mayor número de países en la región reduce la internacionalización de la multinacional en una manera linear. Encontramos apoyo para estas relaciones anticipadas en análisis de multinivel de 698 multinacionales japonesas con operaciones en 49 países en 9 regiones. La complejidad institucional regional es tanto un reto como una nueva oportunidad para multinacionales buscando ventajas mediante la agregación y el arbitraje de factores individuales de país.

Abstract

A pesquisa em negócios internacionais está apenas começando a desenvolver teoria e evidências que destaquem a importância das instituições regionais supranacionais para explicar a internacionalização de empresas. Nesse contexto, nós oferecemos nova teoria e evidências sobre o efeito da "complexidade institucional" de uma região sobre as decisões de investimento direto estrangeiro por empresas multinacionais (MNE). Nós definimos complexidade institucional de uma região usando dois componentes, diversidade institucional regional e número de países. Nós exploramos as relações únicas de ambos os componentes com as decisões das MNE para internacionalizarem-se em países da região. Baseando-nos em semiglobalização, pesquisa sobre regionalização e teoria institucional, postulamos uma relação em forma de U invertido entre a diversidade institucional de uma região e internacionalização da MNE: diversidade institucional regional extremamente baixa ou alta tem efeito negativo sobre a internacionalização, mas diversidade moderada tem um efeito positivo na internacionalização. Um maior número de países na região reduz a internacionalização da MNE de forma linear. Nós encontramos suporte para essas previsões em análises multiníveis de 698 empresas multinacionais japonesas que operam em 49 países e 9 regiões. A complexidade institucional regional é tanto um desafio quanto uma oportunidade para MNE que buscam vantagens através da agregação e arbitragem de fatores individuais de cada país.

Abstract

国际商务研究刚刚才开始开发理论和证据展示超国家区域制度的重要性以解释公司的国际化。在这个情境里, 我们提供了关于区域的“制度复杂性”对跨国公司 (MNEs) 外国直接投资决策影响的新理论和证据。我们用两个组件来定义一个区域的制度复杂性, 即区域制度多样性和国家数目。我们探寻了这两个组件与MNEs向该区域内国家国际化决策的独特关系。借鉴半全球化和区域化研究和制度理论, 我们假定区域制度多样性和MNE国际化之间有一个倒U形关系: 过高或过低的区域制度多样性对国际化有负面影响, 但适度的多样性对国际化有积极作用。该区域内国家数目如果更大将减少跨国公司线性方式的国际化。我们在对9个地区49个国家运营的698家日本MNEs的多层次分析中发现了对这些预期关系的支持。区域制度的复杂性对通过个别国家因素的聚集和套利以寻求优势的MNEs来说既是一个挑战又是一个机会。

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Notes

  1. Fungibility is “the extent to which resources can be deployed for alternative uses at low cost” (Sapienza, Autio, George, & Zahra, 2006: 924).

  2. The inclusion of firms with subsidiaries in only one country could mask potential region and corporate effects, leading to biased results in the models at Levels 2 and 3 (see Bowman & Helfat, 2001; Makino, Isobe, & Chan, 2004). Therefore all our models were also tested on a subsample of 547 MNEs with foreign subsidiaries in more than one country. The results were similar to those based on the full sample, thus confirming that such bias did not exist in our results.

  3. Asia typically houses the largest number of Japanese MNEs’ foreign subsidiaries (Beamish, Delios, & Lecraw, 1997). Therefore, Asia was further divided to get a more detailed view of MNEs’ foreign investment dynamics. Using a geographical approach based on the ASEAN region, a region considered highly relevant for Japanese MNEs’ FDI decisions in Asia (Belderbos & Zou, 2006), we divided Asia into three regions. Countries east of the ASEAN region were categorized as “East Asia,” ASEAN trading bloc countries as “Southeast Asia,” and countries northwest of the ASEAN region as “West Asia.”

  4. Measures of MNE-level degree of internationalization, or scope, such as the firm’s asset dispersion entropy score (Goerzen & Beamish, 2003) would create a bias in this study whereby we would explain a firm-level variable by firm-level independent variables, ignoring the different levels of analysis and measures.

  5. These scores are available for 49 countries, so we consider 49 countries in our geographic regions. However, these countries cover 96% of all the subsidiaries made by Japanese MNEs in Kaigai Shinshutsu Kiyou Souran over the period 2002–2007 and include countries and regions commonly examined in the literature on semiglobalization or FDI activities of MNEs (e.g., Arregle et al., 2013; Banalieva & Dhanaraj, 2013; Chan, Makino, & Isobe, 2008; Rugman & Verbeke, 2004).

  6. While Hofstede’s highly cited research has been instrumental in moving forward cross-cultural research (Kirkman, Lowe, & Gibson, 2006), many have noted the limitations with using his scores. First, there have been challenges made to the theoretical grounding of the dimensions of culture, which may view culture as oversimplistic (Baskerville, 2003; Kirkman et al., 2006). In addition, culture is viewed as changing over time, and some dimensions may be more stable than others (Sivakumar & Nakata, 2001; Tang & Koveos, 2008). Third, his work is criticized because of the interchangeability between country and culture, failing to recognize subnational cultures and the degree to which inconsistent adoption of cultures exists within countries (McSweeney, 2002; Sivakumar & Nakata, 2001). Finally, there are criticisms of the survey-response methodology and aggregation methodology used to produce the results (Javidan, House, Dorfman, Hanges, & de Luque, 2006; McSweeney, 2002). Despite these criticisms, his work continues to have great importance and usefulness within international business studies (Kirkman et al., 2006).

  7. As we had no scores for Slovenia on these three variables, we replaced its missing values by the average scores of its region.

  8. We thank Professor J. Santos Silva for his help on this question.

  9. More precisely, as the coefficients and their corresponding incidence rate ratios are estimated with a multilevel method (i.e., with random effects at Levels 1 and 2), they are “conditional” effects where parameters β, and their incidence rate ratios, measure the change in expected value of response controlling for other covariates and the random effects (Fitzmaurice, Laird, & Ware, 2004; Rabe-Hesketh & Skrondal, 2012).

  10. This method has the major advantage of considering subject-specific (i.e., an MNE in our case) behaviors measured in a multilevel model and not population-average results. When non-linear multilevel models are used, population-average models and their parameters ignore the random effects existing at Level 1 and Level 2, with the risk of measuring population-average effects that do not necessarily reflect or exist at the subject level (risk of “ecological fallacy”; see Fitzmaurice et al., 2004; Lee & Nelder, 2004).

  11. Limited range-dependent variable models (such as Poisson regression) are non-linear, which implies that the value of a variable’s marginal effect is not equal to the model’s coefficient of the variable. This varies with all the model’s variable values (see Hilbe, 2011; Wiersema & Bowen, 2009).

  12. We had no MNEs in the natural resources and mining industries in our sample.

  13. We thank an anonymous reviewer for suggesting that we explore this question.

  14. The four formal institutions are measured on the same scale, and this is also true for the three cultural variables. However, the scales of the formal and cultural variables are very different with much larger values for cultural variables. To avoid biases, all these variables were rescaled between −1 and +1 (using their standardized value and range). These rescaled values are used to compute this new diversity score.

  15. The same problem exists for measures of regional institutional diversity that would not control for a different number of countries (e.g., standard deviation). A bias exists when these are used with groups of different sizes, implicitly taking into account the number of observations in a group (see Biemann & Kearney, 2010). Therefore, the effects they measure would be explained by the institutional diversity and the number of countries, not exclusively by the diversity.

  16. We thank an anonymous reviewer for mentioning this research question.

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Authors and Affiliations

  1. EM Lyon Business School, Ecully, France

    Jean-Luc Arregle

  2. Jindal School of Management, The University of Texas at Dallas, Richardson, TX, USA

    Toyah L Miller

  3. Mays Business School, Texas A&M University, College Station, TX, and Texas Christian University, Ft. Worth, TX, USA

    Michael A Hitt

  4. Ivey Business School, Western University, Ontario, Canada

    Paul W Beamish

Authors
  1. Jean-Luc Arregle
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  2. Toyah L Miller
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  3. Michael A Hitt
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  4. Paul W Beamish
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Correspondence to Jean-Luc Arregle.

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Accepted by Mona Makhija, Area Editor, 19 February 2016. This article has been with the authors for three revisions.

Appendices

APPENDIX 1

Table A1

Table A1 Composition of regions and number of subsidiaries (2001–2007)
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APPENDIX 2

Table B1

Table B1 Robustness checks – Alternative definitions of geographic regionsa b
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Arregle, JL., Miller, T., Hitt, M. et al. How does regional institutional complexity affect MNE internationalization?. J Int Bus Stud 47, 697–722 (2016). https://doi.org/10.1057/jibs.2016.20

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