Business Publications
Document Type
Article
Publication Date
6-2007
Journal
William Davidson Institute Working Paper No. 728
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.
