Academic journal article Management International Review

Institutional Environment and Subsidiary Survival

Academic journal article Management International Review

Institutional Environment and Subsidiary Survival

Article excerpt

Abstract:

* We examine the effect of the institutional environment (IE) on the mortality of overseas subsidiaries. We develop hypotheses to study the impact of political openness and social openness, two dimensions of the institutional environment and how joint venture status moderates these relationships. We test our hypotheses using a sample of 12,000+ Japanese overseas investments from 1986--1997 in 25 countries, using Cox hazard models.

* Our results suggest that the sociopolitical context has a strong influence on the mortality of overseas subsidiaries. We theorized a negative main effect for political and social openness and positive interaction effects with openness when the FDI is through a JV. The results are consistent with the hypotheses. However, political and social openness show significantly different influences on subsidiary mortality.

Keywords: Institutional environment. Political openness * Social openness * International joint venture * Subsidiary survival * Mortality risk

Introduction

A country's economic environment is an important determinant of the extent and performance of the foreign direct investment (FDI) in that country (Dunning 1993). Research has also shown that several other factors that relate to the political and social structure in a host country can also significantly influence FDI, in terms of quantity and performance. However, the absence of a unifying conceptual framework has limited the development of theory in this area. Given the diverse institutional environments that are common in many of the studies in the international business arena, this absence is conspicuous. In this paper, we attempt to provide one such framework leveraging insights from institutional economics to demonstrate how the institutional environment, which is an agglomeration of the political and social structure of a host country, can exert significant influence on the legitimacy and survival of these investments (1) (Gomes-Casseres 1990, Zaheer/Mosakowski 1997). We address the general question characterizing and operationalizing institutional environments by considering a specific question: "What is the effect of institutional environments in a host country on the performance of foreign subsidiaries in the country?"

The study of institutional environments is most apparent in the treatment of MNEs because these firms operate in multiple institutional environments (Kostova/Zaheer 1999, Rosenzweig/Singh 1991). In the international business (IB) literature, two distinct approaches have been used to understand the effect of institutional environments on organizations. The political economy stream emphasizes the risk and complexity of investing in a country arising from the regulatory policy, and uses an array of variables such as political risk, political hazard, and restrictiveness (Boddewyn 1988, Gomes-Casseres 1990, Henisz 2000). The cultural or sociological stream posits that similarity or distance between the home and host country cultures can influence a firm's choice in selecting the investment destination as well as the mode. Psychic distance and cultural distance have been predominantly used for empirical operationalization of culture (Hofstede 1980, Johanson/Vahlne 1977, Kogut/Singh 1988).

Traditionally, researchers have approached the study of the impact of institutional environment on FDI in two stages: The link between the institutional environment and the entry mode and that between entry mode and performance. In both these streams, partnerships with local firms are seen as a way to mitigate the risk and enhance the performance of the investment (Brouthers 1995, Gomes-Casseres 1990, Kobrin 1979, Kogut/ Singh 1988). However, empirical evidence for the phenomenon is sparse as most studies have focused either on the institutional effects on entry mode choices or on the impact of the entry mode choice on the performance. In this paper, we present a systematic study of the combined effects the IE and entry modes have on the survival of the overseas subsidiaries. …

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