Formal and Informal Institutional Distance, and International Entry Strategies

44 Pages Posted: 10 Feb 2005

See all articles by Saul Estrin

Saul Estrin

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Delia Ionascu

CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute), Prague; Copenhagen Business School

Klaus E. Meyer

China Europe International Business School (CEIBS); Copenhagen Business School - Center for East European Studies (CEES)

Date Written: June 14, 2007

Abstract

The effects of "distance" between organizational units have been a prime concern of scholars aiming to explain international business strategies. We expand this line of research to distinguish formal and informal aspects of the institutional frameworks, which have different implications for businesses. Formal (regulatory) differences are generally transparent and require clearly discernable adjustments. In contrast, informal differences are harder to understand and require experiential learning processes. Thus, aspects of distance vary in their impact on foreign investors' costs of benefits of cooperating with local partners. In consequence, business strategies may be affected in opposite ways by formal and informal institutional distance. Moreover, firms already familiar with the local context may have developed internal practices that mitigate certain impacts of distance, and thus adapt differently to institutional differences.

Hypotheses derived from this line of argument are tested on a unique dataset of foreign direct investment in six emerging economies that incorporates multiple host as well as multiple home countries. We find that formal and informal distances have opposite effects on entry mode choice, and that experience moderates the effects of informal distance.

Keywords: emerging economies, entry mode choice, foreign investment strategies, Greenfield, institutional distance, institutional theory

Suggested Citation

Estrin, Saul and Ionascu, Delia and Meyer, Klaus E., Formal and Informal Institutional Distance, and International Entry Strategies (June 14, 2007). William Davidson Institute Working Paper No. 728. Available at SSRN: https://ssrn.com/abstract=665110 or http://dx.doi.org/10.2139/ssrn.665110

Saul Estrin

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Delia Ionascu

CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute), Prague ( email )

Politickych veznu 7
Prague 1, 111 21
Czech Republic
+42 02 2400 5223 (Phone)
+42 02 2421 1374 (Fax)

HOME PAGE: http://www.cerge-ei.cz

Copenhagen Business School

Porcelænshaven 16 A, 1
Frederiksberg C, DK-2000
Denmark

Klaus E. Meyer (Contact Author)

China Europe International Business School (CEIBS) ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

HOME PAGE: http://www.ceibs.edu/faculty/facultylist/09/100132.shtml

Copenhagen Business School - Center for East European Studies (CEES) ( email )

Porcelanshaven 24
2000 Frederiksberg
Denmark

HOME PAGE: http://www.klausmeyer.co.uk

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