Academic journal article Management International Review

The Effect of Regulative and Normative Distances on MNE Ownership and Expatriate Strategies (1)

Academic journal article Management International Review

The Effect of Regulative and Normative Distances on MNE Ownership and Expatriate Strategies (1)

Article excerpt

Abstract

* Researchers have used cultural distance to explain strategic and operational control mechanisms of the multinational enterprise, yet the construct has failed to yield consistent results.

* This study proposed two new measures of country differences, regulative and normative distances, from an institutional perspective, and examined their effect on MNE ownership and expatriate strategies.

Key Results

* Larger regulative and normative distances were associated with a lower level of equity ownership and smaller presence of expatriates for over 2000 Japanese overseas sub-units.

Introduction

The degree of control over the foreign subsidiary is an important subject in multinational enterprise (MNE) research. Two kinds of control have been discussed extensively in the literature: strategic control commonly associated with equity ownership (Gatignon/Anderson 1988, Hennart 1988, Pan 1996), and operational control through the use of expatriates from the home country (Beamish/Inkpen 1998, Boyacigiller 1990). Among the many factors that may have an impact on these two control mechanisms, researchers have paid particular attention to the effect of cultural differences between countries. Early works in this stream (e.g., Davidson 1980) were based on general impressions about national cultures. Beginning with Hofstede (1980), however, the concept of culture became empirically derived, better defined, and commonly accepted (Hofstede 1983).

Building on Hofstede's four cultural dimensions--individualism/collectivism, power distance, uncertainty avoidance, and masculinity/femininity--Kogut/ Singh (1988) compiled a composite index for cultural distance between two countries. The construct has been widely applied in various studies on the multinational enterprise and cross-cultural management (e.g. Barkema/Bell/Pennings 1996, Brouthers/Brouthers 2000, 2001, Hennart/Larimo 1998, Li/Lam/Qian 2001, Manev/Stevenson 2001). It can be readily incorporated by the main theoretical perspectives on foreign direct investment, such as the internationalization school (Johanson/Vahlne 1977, 1990), the transaction cost--internalization theory (Beamish/Banks 1987, Gatignon/Anderson 1988), and the learning perspective (Barkema/Bell/Pennings 1996, Barkema/Vermeulen 1998).

In a recent review, however, Shenkar (2001) pointed out that cultural distance involved some theoretical and methodological illusions, and had failed to produce consistent results in various studies. On the issue of foreign entry mode, for example, cultural distance "has been linked to wholly owned modes, joint venture, or nothing" (Brouthers/Brouthers 2001). It is possible that reliance on cultural distance as a proxy for country differences has over-simplified the complex issue of national environment, and caused researchers to overlook the impact of other societal institutions.

In the meantime, organizational theorists (DiMaggio/Powell 1983, Scott 1995) focused on institutional differences between countries, and more specifically, the extent of dissimilarity between the regulative, normative, and cognitive institutions of two countries (Kostova 1996), in explaining MNE behavior. It has been suggested that greater institutional differences cause more difficulty for the MNE in establishing legitimacy in the host country (Kostova/Zaheer 1999) and transferring organizational practices from the parent firm to the foreign subsidiary (Kostova 1999). The three components of institutional differences--regulative, normative, and cognitive distances--are said to be separate constructs and are issue- and domain-specific (Busenitz/Gomez/Spencer 2000, Kostova 1997, Kostova/Zaheer 1999). In other words, they have separate effects on the MNE, depending on the issue being studied. More recently, Xu/Shenkar (2002) discussed their respective implications for MNE strategy. Specifically, they proposed that larger regulative and normative distances might be associated with lower equity control in the foreign subsidiary. …

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