Journal of International Business Studies

, Volume 41, Issue 6, pp 980–995 | Cite as

The impact of institutional hazards on foreign multinational activity: A contingency perspective

Article

Abstract

Prior studies have shown that institutional hazards in the form of formal governance deficiencies and informal cultural distance are both negatively related to the amount of foreign multinational activity in countries. We argue that the strength of these negative relationships varies systematically with the type of foreign activity (horizontal or vertical) and the type of institutional hazard (governance or cultural). Because institutional hazards striking vertical affiliates generally also have negative consequences for other parts of a multinational enterprise (MNE) while those striking horizontal affiliates do not, we hypothesize that institutional hazards are more negatively related to vertical foreign activity than to horizontal foreign activity. Since cultural hazards can generally be reduced or resolved once they materialize while governance hazards cannot, we also hypothesize that the impact of governance hazards on each type of foreign activity is more negative than the impact of cultural hazards on that type of activity. A panel data analysis of sales by US foreign affiliates to affiliated and local unaffiliated customers over the period 1996–2004 lends support to these hypotheses. Our findings thus show that the impact of institutional hazards on foreign MNE activity is more complex than previously assumed.

Keywords

multiple regression analysis cultural distance foreign direct investment governance quality contingency perspective multinational activity 

References

  1. Adler, N. J. 1986. Communicating across cultural barriers. In N. Adler (Ed.) International dimensions of organizational behavior: 50–75. Boston, MA: Kent Publishing.Google Scholar
  2. Barkema, H. G., Bell, J. H. J., & Pennings, J. M. 1996. Foreign entry, cultural barriers, and learning. Strategic Management Journal, 17 (2): 151–166.CrossRefGoogle Scholar
  3. Belsley, D. A., Kuh, E., & Welsch, R. E. 1980. Regression diagnostics: Identifying influential data and sources of collinearity. New York: Wiley.CrossRefGoogle Scholar
  4. Benito, G. R. G. 1997. Divestment of foreign production operations. Applied Economics, 29 (10): 1365–1377.CrossRefGoogle Scholar
  5. Beugelsdijk, S., Pedersen, T., & Petersen, B. 2009. Is there a trend towards global value chain specialization? An examination of cross border sales of US foreign affiliates. Journal of International Management, 15 (2): 126–141.CrossRefGoogle Scholar
  6. Beugelsdijk, S., Smeets, R., & Zwinkels, R. 2008. The impact of horizontal and vertical FDI on host's country economic growth. International Business Review, 17 (4): 452–472.CrossRefGoogle Scholar
  7. Bevan, A., Estrin, S., & Meyer, K. 2004. Foreign investment location and institutional development in transition economies. International Business Review, 13 (1): 43–64.CrossRefGoogle Scholar
  8. Black, J. S., Mendenhall, M., & Oddou, G. 1991. Towards a comprehensive model of international adjustment: An integration of multiple theoretical perspectives. Academy of Management Review, 16 (2): 291–317.Google Scholar
  9. Brainard, S. L. 1997. An empirical assessment of the proximity-concentration trade-off between multinational sales and trade. American Economic Review, 87 (4): 520–544.Google Scholar
  10. Brouthers, K. D., & Brouthers, L. E. 2001. Explaining the national cultural distance paradox. Journal of International Business Studies, 32 (1): 177–189.CrossRefGoogle Scholar
  11. Brouthers, L. E., Gao, Y., & McNicol, J. P. 2008. Corruption and market attractiveness influences on different types of FDI. Strategic Management Journal, 29 (6): 673–680.CrossRefGoogle Scholar
  12. Campbell, N. C. G., Graham, J. L., Jolibert, A., & Meissner, H. C. 1988. Marketing negotiations in France, Germany, the United Kingdom, and the United States. Journal of Marketing, 52 (2): 49–62.CrossRefGoogle Scholar
  13. Cannella, A. A., Park, J.-H., & Lee, H.-U. 2008. Top management team functional background diversity and firm performance: Examining the roles of team member collocation and environmental uncertainty. Academy of Management Journal, 51 (4): 768–784.Google Scholar
  14. Caves, R. E. 2007. Multinational enterprise and economic analysis, (3rd ed.) New York: Cambridge University Press.CrossRefGoogle Scholar
  15. Chang, S.-J., & Rosenzweig, P. M. 2001. The choice of entry mode in sequential foreign direct investment. Strategic Management Journal, 22 (8): 747–776.CrossRefGoogle Scholar
  16. Cuypers, I. R. P., & Martin, X. 2010. What makes and what does not make a real option? A study of equity shares in international joint ventures. Journal of International Business Studies, 41 (1): 47–69.CrossRefGoogle Scholar
  17. Delios, A., & Henisz, W. J. 2000. Japanese firms’ investment strategies in emerging economies. Academy of Management Journal, 43 (3): 305–323.CrossRefGoogle Scholar
  18. Delios, A., & Henisz, W. J. 2003. Political hazards, experience, and sequential entry strategies: The international expansion of Japanese firms, 1980–1998. Strategic Management Journal, 24 (11): 1153–1164.CrossRefGoogle Scholar
  19. Dikova, D., & van Witteloostuijn, A. 2007. Foreign direct investment mode choice: Entry and establishment modes in transition economies. Journal of International Business Studies, 38 (6): 1013–1033.CrossRefGoogle Scholar
  20. Dikova, D., Rao Sahib, P., & Van Witteloostuijn, A. 2010. Cross-border acquisition abandonment and completion: The effect of institutional differences and organizational learning in the international business service industry, 1981–2001. Journal of International Business Studies, 41 (2): 223–245.CrossRefGoogle Scholar
  21. Dunning, J. H. 1993. Multinational enterprises and the global economy. Wokingham, UK: Addison-Wesley.Google Scholar
  22. Flores, R. G., & Aguilera, R. V. 2007. Globalization and location choice: An analysis of US multinational firms in 1980 and 2000. Journal of International Business Studies, 38 (7): 1187–1210.CrossRefGoogle Scholar
  23. Folta, T. B. 1998. Governance and uncertainty: The trade-off between administrative control and commitment. Strategic Management Journal, 19 (11): 1007–1028.CrossRefGoogle Scholar
  24. Globerman, S., & Shapiro, D. M. 1999. The impact of government policies on foreign direct investment: The Canadian experience. Journal of International Business Studies, 30 (3): 513–532.CrossRefGoogle Scholar
  25. Globerman, S., & Shapiro, D. M. 2003. Governance infrastructure and US foreign direct investment. Journal of International Business Studies, 34 (1): 19–39.CrossRefGoogle Scholar
  26. Greene, W. 2008. Econometric analysis, (6th ed.) Upper Saddle River, NJ: Prentice Hall.Google Scholar
  27. Grosse, R., & Trevino, L. J. 1996. Foreign direct investment in the United States: An analysis by country of origin. Journal of International Business Studies, 27 (1): 139–155.CrossRefGoogle Scholar
  28. Habib, M., & Zurawicki, L. 2002. Corruption and foreign direct investment. Journal of International Business Studies, 33 (2): 291–307.CrossRefGoogle Scholar
  29. Hair Jr, J. F., Anderson, R. E., Tatham, R. L., & Black, W. C. 1998. Multivariate data analysis, (5th ed.) Upper Saddle River, NJ: Prentice Hall.Google Scholar
  30. Heckman, J. 1979. Sample selection bias as a specification error. Econometrica, 47 (1): 153–161.CrossRefGoogle Scholar
  31. Henisz, W. J., & Delios, A. 2001. Uncertainty, imitation, and plant location: Japanese multinational corporations, 1990–1996. Administrative Science Quarterly, 46 (3): 443–475.CrossRefGoogle Scholar
  32. Hennart, J.-F., & Park, Y.-R. 1994. Location, governance, and strategic determinants of Japanese manufacturing investment in the United States. Strategic Management Journal, 15 (6): 419–436.CrossRefGoogle Scholar
  33. Hofstede, G. 1980. Culture's consequences: International differences in work-related values. Beverly Hills, CA: Sage Publications.Google Scholar
  34. Ingram, P., Robinson, J., & Busch, M. L. 2005. The intergovernmental network of world trade: IGO connectedness, governance, and embeddedness. American Journal of Sociology, 111 (3): 824–858.CrossRefGoogle Scholar
  35. Kaufmann, D., Kraay, A., & Mastruzzi, M. 2006. Governance matters V: Aggregate and individual governance indicators for 1996–2005. World Bank Policy Research Working Paper 4012, World Bank, Washington, DC.Google Scholar
  36. Khanna, T. 2007. China+India: The power of two. Harvard Business Review, 85 (12): 60–69.Google Scholar
  37. Kim, S. H., & Kim, S. H. 1993. Motives for Japanese direct investment in the United States. Multinational Business Review, 1 (1): 66–72.Google Scholar
  38. Kobrin, S. J. 1976. The environmental determinants of foreign direct manufacturing investment: An ex-post empirical analysis. Journal of International Business Studies, 7 (2): 29–42.CrossRefGoogle Scholar
  39. Kobrin, S. J. 1991. An empirical analysis of the determinants of global integration. Strategic Management Journal, 12 (Summer Special Issue): 17–31.CrossRefGoogle Scholar
  40. Kogut, B., & Singh, H. 1988. The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19 (3): 411–432.CrossRefGoogle Scholar
  41. Kostova, T., & Zaheer, S. 1999. Organizational legitimacy under conditions of complexity: The case of the multinational enterprise. Academy of Management Review, 24 (1): 64–81.Google Scholar
  42. Kumar, N. 1994. Determinants of export orientation of foreign production by US multinationals: An inter-country analysis. Journal of International Business Studies, 25 (1): 141–156.CrossRefGoogle Scholar
  43. Lenway, S. A., & Murtha, T. P. 1994. The state as a strategist in international business research. Journal of International Business Studies, 25 (3): 513–535.CrossRefGoogle Scholar
  44. Li, J., & Rugman, A. M. 2007. Real options and the theory of foreign direct investment. International Business Review, 16 (6): 687–712.CrossRefGoogle Scholar
  45. Loree, D. W., & Guisinger, S. 1995. Policy and non-policy determinants of US equity foreign direct investment. Journal of International Business Studies, 26 (2): 281–299.CrossRefGoogle Scholar
  46. Motta, M., & Thisse, J.-F. 1994. Does environmental dumping lead to delocation? European Economic Review, 38 (3–4): 563–576.CrossRefGoogle Scholar
  47. Nachum, L., & Zaheer, S. 2005. The persistence of distance? The impact of technology on MNE motivations for foreign investment. Strategic Management Journal, 26 (8): 747–767.CrossRefGoogle Scholar
  48. Nigh, D. 1985. The effect of political events on United States foreign direct investment: A pooled time-series cross-sectional analysis. Journal of International Business Studies, 16 (1): 1–17.CrossRefGoogle Scholar
  49. North, D. C. 1990. Institutions, institutional change, and economic performance. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
  50. Prahalad, C. K., & Doz, Y. L. 1987. The multinational mission: Balancing local demands and global vision. New York: Free Press.Google Scholar
  51. Rangan, S., & Drummond, A. 2004. Explaining outcomes in competition among foreign multinationals in a focal host market. Strategic Management Journal, 25 (3): 285–293.CrossRefGoogle Scholar
  52. Rodriguez, P., Uhlenbruck, K., & Eden, L. 2005. Government corruption and the entry strategies of multinationals. Academy of Management Review, 30 (2): 383–396.CrossRefGoogle Scholar
  53. Root, F. R. 1987. Entry strategies for international markets. Lexington, MA: D.C. Heath.Google Scholar
  54. Root, F. R. 1988. Environmental risks and the bargaining power of multinational corporations. International Trade Journal, 3 (1): 111–124.CrossRefGoogle Scholar
  55. Sanchez-Peinado, E., & Pla-Barber, J. 2006. A multidimensional concept of uncertainty and its influence on the entry mode choice: An empirical analysis in the service sector. International Business Review, 15 (3): 215–232.CrossRefGoogle Scholar
  56. Schneider, S. C., & De Meyer, A. 1991. Interpreting and responding to strategic issues: The impact of national culture. Strategic Management Journal, 12 (4): 307–320.CrossRefGoogle Scholar
  57. Sethi, D., Guisinger, S. E., Phelan, S. E., & Berg, D. M. 2003. Trends in foreign direct investment flows: A theoretical and empirical analysis. Journal of International Business Studies, 34 (4): 315–326.CrossRefGoogle Scholar
  58. Shan, W. 1991. Environmental risks and joint venture sharing arrangements. Journal of International Business Studies, 22 (4): 555–578.CrossRefGoogle Scholar
  59. Shenkar, O. 2001. Cultural distance revisited: Towards a more rigorous conceptualization and measurement of cultural differences. Journal of International Business Studies, 32 (3): 519–535.CrossRefGoogle Scholar
  60. Slangen, A. H. L., & Hennart, J.-F. 2008. Do foreign greenfields outperform foreign acquisitions or vice versa? An institutional perspective. Journal of Management Studies, 45 (7): 1301–1328.CrossRefGoogle Scholar
  61. Van Mesdag, M. 2000. Culture-sensitive adaptation or global standardization: The duration-of-usage hypothesis. International Marketing Review, 17 (1): 74–84.CrossRefGoogle Scholar
  62. Vermeulen, F., & Barkema, H. G. 2001. Learning through acquisitions. Academy of Management Journal, 44 (3): 457–476.CrossRefGoogle Scholar
  63. Wooldridge, J. M. 2002. Econometric analysis of cross section and panel data. Cambridge, MA: MIT Press.Google Scholar
  64. Yamazaki, Y., & Kayes, D. C. 2007. Expatriate learning: Exploring how Japanese managers adapt in the United States. International Journal of Human Resource Management, 18 (8): 1373–1395.CrossRefGoogle Scholar
  65. Zaheer, S. 1995. Overcoming the liability of foreignness. Academy of Management Journal, 38 (2): 341–363.CrossRefGoogle Scholar
  66. Zellner, A. 1962. An efficient method of estimating seemingly unrelated regressions and tests for aggregation bias. Journal of the American Statistical Association, 57 (298): 348–368.CrossRefGoogle Scholar

Copyright information

© Academy of International Business 2010

Authors and Affiliations

  1. 1.Amsterdam Business School, University of Amsterdamthe Netherlands
  2. 2.University of Groningenthe Netherlands

Personalised recommendations