Research Paper on Institutional distances and the competitive advantage of foreign subsidiaries in Latin America: formal vs. informal

Description

Title: Institutional distances and the competitive advantage of foreign subsidiaries in Latin America: formal vs. informal

Abstract: This study investigates the competitive advantage of foreign subsidiary firms from developed countries and emerging markets operating in Latin America by focusing on the implicit and explicit characteristics of informal and formal institutional distances. This study measured the size and direction of distances and computed formal institutional distances based on the world governance indicators from the World Bank, whereas informal institutional distances are computed using the four original Hofstede dimensions. This was done in response to recent research on distances in international management. It is argued that these differences affect one’s capacity to translate experience dealing with cultural and formal institutional conditions in one’s home country into firm specific advantages (FSAs) in a foreign host country. Culture is tacit, whereas formal institutions are explicit. Using information from the Orbis database, a sample of over 4200 firm-year observations covering 10 of the biggest economies in Latin America, these hypotheses are quantitatively tested. It is demonstrated that the effects in particular directions are different for foreign subsidiaries from developed countries and from emerging markets, breaking with earlier studies looking into the implications of FID direction. The findings show that foreign subsidiaries from developed countries can adjust more positively when operating in host countries with strong formal institutions, whereas emerging market firms are at an advantage when operating in less developed host countries. On the other hand, the direction of the effects of the various CD dimensions in relation to host nations with particular cultural profiles. According to these results, foreign subsidiaries from developing markets have a distinct advantage when it comes to filling institutional gaps in Latin America (i.e., FID towards less developed host countries), whereas CD has an equal impact on all firms. This suggests that what matters most is the cultural landscape of the host nation.

Keywords: direction of distance; cultural distance; formal institutional distance; asymmetry; Latin America; foreign subsidiary performance; internationalization theory

Paper Quality: SCOPUS / Web of Science Level Research Paper

Subject: Economics

Writer Experience: 20+ Years

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