When Does Prior Experience Pay? Institutional Experience and the Case of the Multinational Corporation

Abstract

This study re-examines organizational learning theories to reconcile the conditions under which prior experience leads to performance gains. Using the context of multinational corporations’ (MNCs’) heterogeneous host country institutional experiences, and using field studies on telecommunications regulation, executive interviews (conducted in Brazil, Spain, Portugal, Canada, and the U.S.), and a foreign direct investment dataset, I develop an experiential-learning theoretical framework to explain the mechanisms driving MNCs’ performance in subsequent host country institutional environments. Prior experience is operationalized as the knowledge acquired in 80 heterogeneous regulatory environments and a distance calculation is used to compute firm-level distance measures for 96 subunit operations investing in the Brazilian telecommunications industry from 1997 to 2004. I predict that MNCs with highly similar institutional experience compared with the target country’s institutional environment will succeed. Empirical evidence suggests that similarity, breadth, and depth of prior regulatory experience significantly prolong survival. In contrast, firms with institutional experience unrelated to the target country’s regulatory environment experience learning penalties and are six times more likely to fail. These findings suggest that variations in learning contexts affect organizations’ learning curves.

Keywords: institutions, regulation, experiential learning

JEL Classification: F23, L96, N40