Institutional distance, establishment mode choice and international experience: the case of Indian MNCs

Date02 January 2018
DOIhttps://doi.org/10.1108/JABS-01-2016-0015
Published date02 January 2018
Pages60-80
AuthorLaura Rienda,Enrique Claver,Diego Quer
Subject MatterStrategy,International business
Institutional distance, establishment
mode choice and international
experience: the case of Indian MNCs
Laura Rienda, Enrique Claver and Diego Quer
Laura Rienda,
Enrique Claver and
Diego Quer are all based
at the University of
Alicante, Alicante, Spain.
Abstract
Purpose Focusing on the growing importance of Indian multinational corporations in the past
decades, this paper aims to understand how establishment mode decisions in a foreign market can
differ depending on a series of factors. Specifically, the authors examine how institutional distance,
including cultural distance and political risk, could affect these decisions, and how international
acquisition experience could moderate this relationship.
Design/methodology/approach The authors test their hypotheses using data from 114 outward
foreign direct investments between 2000 and 2010.
Findings The findings suggest that experience in international acquisitions increases the likelihood of
subsequent acquisitions in high-risk and culturally distant countries.
Originality/value By considering that the country of origin also matters, some differences among
emerging-market multinational corporations (MNCs) may arise. Besides, since empirical research focusing
on emerging-market MNCs is scarce, more empirical studies are needed to analyze the influence of cultural
distance and political risk on some decisions. In the case of India, there are also additional motivations for
analyzing those institutional factors. First, since this is a country with significant linkages to Western
countries, it is interesting to know if the influence of cultural distance is similar or not. Second, there is a lack
of empirical evidence on the relationship between political risk and establishment mode choice in the case
of Indian MNCs. To fill this gap, the first aim of this paper is to analyze how cultural distance and political risk
affect the establishment mode choice of Indian MNCs. Moreover, recognizing international experience to be
an important factor in explaining international expansion, we focus on international experience interactions
with sources of uncertainty inherent in the host market.
Keywords International experience, Institutional distance, Political risk, Acquisitions, Cultural distance
Paper type Research paper
1. Introduction
In recent years, studies focusing on emerging-market MNCs have become increasingly
important. Although most studies on internationalization drew on the paradigms of developed
economies, the resulting theories may need an adaptation in the case of emerging markets
(Quer et al., 2012). Emerging economies represent a new context with their own characteristics
in terms of how their resources are configured when compared with developed countries; for
example, firms from developing countries do not usually have the same ownership advantages
as large MNCs from developed economies or they do not have the same experience as those
in developed countries. Even some authors state that MNCs from emerging markets and MNCs
from developed markets are in different stages of evolution as MNCs (Ramamurti, 2012).
Although our paper focuses on emerging markets, as Pradhan and Sauvant (2010)
emphasize, India follows a different pattern in the case of emerging markets, this being
more evident when comparing India with the other major emerging economy: China. Some
scholars suggest that Indian outward foreign direct investment (OFDI) does not represent
Received 24 January 2016
Revised 24 June 2016
Accepted 27 July 2016
PAGE 60 JOURNAL OF ASIA BUSINESS STUDIES VOL. 12 NO. 1, 2018, pp. 60-80, © Emerald Publishing Limited, ISSN 1558-7894 DOI 10.1108/JABS-01-2016-0015
a substantial challenge to conventional theory (Chen, 2012). Actually, the Indian economy
presents some characteristics that are more related to developed markets such as its
institutional environment, which is as liberal and business friendly as that of many
developed countries, or its firms, that are sophisticated in terms of technology, operations
and management. Thus, it would be interesting to know if Indian MNCs follow the same
behavior pattern of other emerging-market MNCs or if they are closer to developed-country
MNCs.
Many international business researchers have focused on entry mode choice. A firm that
decides to expand into foreign markets must decide between keeping and sharing control
of its subsidiaries (Arregle et al., 2006). Also, the firm must decide whether to acquire an
existing local firm, through an acquisition, or to make a greenfield investment (Barkema and
Vermeulen, 1998;Hennart and Park, 1993). In absolute terms, and as a proportion of total
FDI, cross-border acquisitions have been increasing rapidly over the years (Anand and
Delios, 2002).
Although there is a large number of papers focusing on entry mode choice in emerging
markets (wholly owned subsidiary vs joint venture), papers analyzing decisions about
ownership structure (acquisitions vs greenfield) are more scant. This paper follows recent
research efforts examining the factors that lead Indian firms to enter foreign markets
through acquisitions, compared with the option of a start-up in the foreign country using
greenfield investments (Buckley et al., 2012b;Duanmu and Guney, 2009;Nayyar, 2008;
Pradhan and Abraham, 2004;Rangan and Parriño, 2008;Singh, 2009). Academic literature
about the surge of cross-border investments of Indian companies is still quite scarce (De
Beule and Duanmu, 2012), and as we point out in the theory and hypotheses section of this
paper, empirical findings are not conclusive.
In this context, cultural distance and political risk are two of the most researched host
country institutional factors (López and Vidal, 2010;Morschett et al., 2010;Quer et al.,
2007). The vast majority of research papers dealing with these institutional factors focused
on developed economies (Barkema and Vermeulen, 1998; Cho and Padmanabhan, 2005;
Harzing, 2002;Kogut and Singh, 1988;Tihanyi et al., 2005), some of them focused on
emerging markets (Bhaumik and Gelb, 2005;Demirbag et al., 2008;Meyer et al., 2009;
Quer et al., 2012;Rienda et al., 2013) and others compared developed and emerging
markets (Malhotra et al., 2011). In any case, mixed conclusions can be drawn when
comparing the results from these prior studies.
Most papers about MNCs from developed countries suggest that when cultural distance or
political risk are lower, the MNC prefers to use acquisitions as an establishment mode in the
host country (Agarwal and Ramaswami, 1992;Barkema and Vermeulen, 1998;Collins et al.,
2009;Harzing, 2002;Klein et al., 1990;Kogut and Singh, 1988;Tihanyi et al., 2005).
However, there are also papers reporting a non-significant relationship between cultural
distance and the option of acquisitions (Brouthers and Brouthers, 2000;Cho and
Padmanabhan, 1995;Demirbag et al., 2008;Meyer et al., 2009).
In the case of emerging markets, we found similar results when considering cultural
distance. Most papers found a negative relationship between cultural distance and
acquisitions (Aybar and Ficici, 2009;Bhaumik and Gelb, 2005;Buckley et al., 2009). By
contrast, in the case of India, cultural distance could not be a factor that affects these
ownership decisions (Buckley et al., 2012b).
Regarding political risk, although we found few papers about this specific factor, there are also
differences among emerging markets’ patterns. First, some papers report that, in the case of
emerging-market MNCs, there is no relationship between political risk and decisions about
ownership structure (Duanmu, 2012;Duanmu and Guney, 2009;Quer et al., 2012). Indian firms
have experience of operating within a home country environment which does not offer good
socioeconomic conditions as developed countries do. This is one of the reasons by which
VOL. 12 NO. 1 2018 JOURNAL OF ASIA BUSINESS STUDIES PAGE 61

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