Academic journal article Management International Review

An Institutional Perspective on Foreign Direct Investment: A Multi-Level Framework

Academic journal article Management International Review

An Institutional Perspective on Foreign Direct Investment: A Multi-Level Framework

Article excerpt


* The process of foreign direct investment (FDI) is inherently uncertain as decisions surrounding investments are impacted by fragmented environments which offer contested views as to appropriate actions.

* We propose a multi-level organizing framework of institutional influences on FDI and examine the differential effect of these forces at two points in time: Prior to a first investment and upon subsequent investments.

* We posit that upon initial entry, firms are impacted primarily by coercive host country pressures, industry mimeticism, and internal firm norms. We expect these influences to change on subsequent entries with normative forces having the most salience.

Keywords: Foreign direct investment. Institutional theory' Multiple-level framework


Research on foreign direct investment (FDI) has tried to explain the where (investment location), when (timing of entry) and how (entry mode) of foreign direct investment decisions, broadly defined as equity based investments including greenfield investment, joint venture and acquisition in a foreign country (Chang/Rosenzweig 2001, Dunning 1979, Johanson/Vahlne 1977, Kogut/Singh 1988, Madhok 1997). Historically, researchers have relied upon economic perspectives which suggest that firms choose strategies in attempt to achieve optimal solutions (Gatignon/Anderson 1988, Dunning 1979, Kim/Hwang 1992). However, when making investment decisions, firms face a multitude of uncertainties and are influenced by numerous and often conflicting information cues that do not always lend themselves to rational decision making models.

In recent years, the sociology-oriented institutional perspective has been introduced to the FDI literature (Chang 1995, Guillen 2002, Lu 2002, Martin/Swaminathan/Mitchell 1998, Martinez/Dacin 1999, Roberts/Greenwood 1997). The institutional perspective view firms as social actors, who do not have complete information about the economic efficiency and effectiveness of their strategies ex-ante (Meyer/Rowan 1977). Firm decisions and behaviors are nested within historical and cultural contexts and, in order to reduce uncertainty, firms look for cues from their social environment and interactions with other firms in order to gain information about potential opportunities, constraints and the legitimacy of their actions.

While research on FDI has begun to acknowledge the existence and criticality of institutional forces, it has not dealt yet with the issues of selective attention and goal prioritization for firms making strategic choices. Firms are presumed to heed all types of institutional pressures at all times and to yield to such pressures whenever they encounter them (Oliver 1991). Some researchers have already acknowledged the often conflicting results from foreign entry studies and suggest institutional theory as a means for explaining them (Delios/Henisz 2003). We believe investigating the diverse institutional pressures on FDI decisions more fully will shed light on such conflicting results.

Decision makers, constrained by bounded-rationality, cannot and do not uniformly conform to all institutional pressures (Oliver 1990, Simon 1947). March and Simon (1958) suggest that decision makers utilize their limited attention to focus on key threats and opportunities when making their choices. This "attention based" view of the firm highlights the criticality of attention structures, rules, resources and attention-directors within a firm to direct managerial attention to focus on select stimuli (March/Shapira 1992, Ocasio 1997). Oliver (1991) builds on the institutional perspective to propose that firms can respond differently to the same environmental pressures with actions ranging from acquiescence or compromise, to avoidance, manipulation and even outright defiance.

This paper applies and integrates those insights from decision making literature to the decisions on FDI. …

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