Academic journal article The Journal of Developing Areas

Institutional Distance Factors Influencing Firm Performance: A Hypothetical Framework from Cross-Border Mergers and Acquisitions

Academic journal article The Journal of Developing Areas

Institutional Distance Factors Influencing Firm Performance: A Hypothetical Framework from Cross-Border Mergers and Acquisitions

Article excerpt

INTRODUCTION

Corporations use cross-border mergers and acquisitions or CBMAs to grow their activities in foreign countries. The expansion of international markets in terms of product input and output has let organizations to search for new markets to utilize their current capabilities or to find new areas for their assets according to a study carried out by (March, 1991). Accordingly, these expansions in global practices provide organizations with a method to gather new major assets while lowering the cost of these exchanges (Hennart, 2011). Obviously, global functions carry certain risks since the organizations have to address local as well as multi-national enterprises or MNEs, and be engaged in a new unique domain compared to their home base because of different institutional forces1 (Berry, Guillén, & Zhou, 2010). Due to the path-dependent characteristics of institutions and their conditions, it is quite different across different countries (Kostova, 1999; Makino, Isobe, & Chan, 2004), which in turn has an effect on the performance of an organization (Chakrabarti, Gupta-Mukherjee, & Jayaraman, 2009; Schoenberg, 2006; Trevino, Thomas, & Cullen, 2008). In spite of the rapid growth of globalization, there are still variations among institutions from various countries.

Despite the rapid pace of globalization, differences between institutions in different countries are not yet attenuated (Meyer, Mudambi, & Narula, 2011). Developed countries are more likely to possess developed institutions with well-developed market factors, fewer governmental interferences, and an efficient contract enforcement mechanism (Wu, 2014). The costs incurred in running businesses in these countries tend to be low thus facilitating further economic ventures. However, developing countries are more likely to possess less-developed institutions whereby local organizations experience limitations as a result of not having sufficiently developed institutions that support the market with the issues of added risks, costs, and restrictions (Wu, 2014).

This study includes four major sections following the introduction section. The subsequent section will be on literature of CBMAs from the perspective of institutional distance. Following this, the theoretical framework and rationale for this approach is discussed. The final section will present an extended discussion, concluding remarks and possible areas for future research.

BRIEF LITERATURE REVIEW

There are three main foundations for the institutional environment namely regulative, normative, and cognitive (Scott, 1995). Formal guidelines as well as principles set by any country are a part of the regulative institution (North, 1990), while social commitments include the social and normal practices in a country fall under the normative institution (Scott, 1995). The third foundation is set by the cognitive institution which determines the general way of life of the public in a country including the individual's quality arrangement (DiMaggio & Powell, 2000). Organizations that operate outside of a country such MNEs are required to take note of contrasts that could appear between the home-based and host nation institutions. The differences and similarities of these institutions are normally separated (Kostova, 1999) and could be different for each of the institutional foundation (Kostova, Roth, & Dacin, 2008).

Up until the mid-1990s, studies have concentrated on the country-level institutions. After that period, more attention has been given to the contrasts between the institutions and the roles of these institutions in an international business arena (Peng, Sun, Pinkham, & Chen, 2009). According to Kostova and Zaheer (1999), the home and host countries' institutional distance should be given more attention compared to the study of individual institution; this is now apparent with more studies now being carried out in this area (Berry et al., 2010; Busenitz, Gomez, & Spencer, 2000; Ghemawat, 2001; Xu & Shenkar, 2002). …

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