Strategic asset-seeking foreign direct investments by emerging market firms: the role of institutional distance
International Journal of Emerging Markets
ISSN: 1746-8809
Article publication date: 17 May 2022
Issue publication date: 12 December 2023
Abstract
Purpose
This study examines the impact of formal and informal institutional distances on the foreign ownership strategies of emerging market firms (EMFs).
Design/methodology/approach
This is an empirical study relying on two sets of data collected over two time periods, 2006–2008 and 2017–2019, for publicly-listed Chinese companies.
Findings
Greater formal institutional distances in the host and home countries make EMFs less likely to use joint ventures (JVs), while greater informal distances make EMFs more likely to use the JVs. When both formal and informal institutional distances are high, the use of JVs is more likely. These results are affected by the goal of the foreign direct investment (FDI) project, with strategic asset-seeking (SAS) FDI projects favoring the use of wholly owned subsidiaries (WOSs).
Research limitations/implications
This study relies on cross-sectional data from publicly-listed Chinese companies, which may limit the generalizability of the findings.
Practical implications
EMFs investing in advanced countries should carefully assess the tradeoffs between transactional cost efficiency and legitimacy in making their foreign ownership decisions. If the goal is to access strategic assets, EMFs should consider WOSs to ensure the transfer of strategic assets and create value for the parent company.
Originality/value
The findings show that formal and informal distances between institutions have different impacts on foreign ownership strategies, providing empirical evidence for the need to balance conflicting cost-efficiency and legitimacy considerations when businesses make such strategic decisions. The authors show how this balance depends on the goal of the FDI project.
Keywords
Acknowledgements
The authors wish to thank the Editor-in-Chief Professor Ilan Alon and the Senior Editor Professor Stefano Elia for providing guidance and recommendations, which helped to improve the paper significantly. The authors particularly wish to thank the anonymous reviewers who provided constructive comments and suggestions to steer the authors to the path that eventually led to the successful publication of the paper. This paper was made possible by the generous financial support from the China Business Studies Institute (CBSI) at the University of San Francisco. Thanks are also due to Dr. Anne Chapple who meticulously edited this manuscript to lift the quality of the writing in this paper.
Citation
Yang, Y., Xu, J., Allen, J.P. and Yang, X. (2023), "Strategic asset-seeking foreign direct investments by emerging market firms: the role of institutional distance", International Journal of Emerging Markets, Vol. 18 No. 12, pp. 6081-6101. https://doi.org/10.1108/IJOEM-04-2020-0346
Publisher
:Emerald Publishing Limited
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