The construct of institutional distance through the lens of different institutional perspectives: Review, analysis, and recommendations

Tatiana Kostova; Sjoerd Beugelsdijk; W. Richard Scott; Vincent E. Kunst; Chei Hwee Chua; Marc van Essen

doi:10.1057/s41267-019-00294-w

The construct of institutional distance through the lens of different institutional perspectives: Review, analysis, and recommendations

Kostova, Tatiana; Beugelsdijk, Sjoerd; Scott, W. Richard; Kunst, Vincent E.; Chua, Chei Hwee; van Essen, Marc 2020-06-20 00:00:00 Tatiana Kostova , This paper presents a review and critique of the 20-year-old literature on Sjoerd Beugelsdijk , institutional distance, which has greatly proliferated. We start with a discussion W. Richard Scott , of the three institutional perspectives that have served as a theoretical foundation for this construct: organizational institutionalism, institutional Vincent E. Kunst , economics, and comparative institutionalism. We use this as an organizing Chei Hwee Chua and framework to describe the different ways in which institutional distance has Marc van Essen been conceptualized and measured, and to analyze the most common organizational outcomes that have been linked to institutional distance, as Moore School of Business, University of South well as the proposed explanatory mechanisms of those effects. We substantiate Carolina, 1014 Greene St, Columbia, SC 29208, our qualitative review with a meta-analysis, which synthesizes the main ﬁndings USA; Faculty of Economics and Business, in this area of research. Building on our review and previous critical work, we University of Groningen, Nettelbosje 2, note key ambiguities in the institutional distance literature related to underlying 9700 AV Groningen, The Netherlands; 3 theoretical perspectives and associated mechanisms, distance versus proﬁle Department of Sociology, Stanford University, effects, and measurement. We conclude with actionable recommendations for 450 Serra Mall, Stanford, CA 94305, USA; improving institutional distance research. University of Liverpool Management School, University of Liverpool, Chatham St, Journal of International Business Studies (2020) 51, 467–497. Liverpool L69 7ZH, UK https://doi.org/10.1057/s41267-019-00294-w Correspondence: Keywords: institutional theory; institutional distance; institutional context T Kostova, Moore School of Business, University of South Carolina, 1014 Greene St, Columbia, SC 29208, USA The online version of this article is available Open Access e-mail: [email protected] INTRODUCTION International business scholars have long recognized the impor- tance of national context and contextual embeddedness of orga- nizations (Westney, 1993), and have studied the impact of ‘‘distance’’, i.e., cross-country contextual differences, on ﬁrms’ strategies, management practices, and organizational outcomes (e.g., Johanson & Vahlne, 1977; Kogut & Singh, 1988; Kostova & Zaheer, 1999). Given that conducting business across borders is a Received: 22 February 2018 deﬁning characteristic of multinational companies (MNCs), some Revised: 19 September 2019 have concluded that ‘‘essentially, international management is Accepted: 9 November 2019 Online publication date: 20 December 2019 The construct of institutional distance Tatiana Kostova et al management of distance’’ (Zaheer et al., 2012: 19). elements (Kostova, 1996; Scott, 1991). Institutional Reﬂecting the different domains of national con- distance also allows the capturing of the dynamic text, scholars have examined different types of aspects of context, reﬂecting important institu- distance including cultural (e.g., Beugelsdijk, Kos- tional changes in countries throughout the world. tova, Kunst, Spadafora, & van Essen, 2018b; Kirk- Theoretically, it can be more precise in its predic- man, Lowe, & Gibson, 2006, 2017; Kogut & Singh, tions than cultural distance if analyzed with regard 1988; Shenkar, Luo, & Yeheskel, 2008), psychic to a speciﬁc issue, for example, quality manage- (e.g., Dow & Karunaratna, 2006; Johanson & ment (Kostova, 1996) or entrepreneurship (Busen- Vahlne, 1977), geographic (e.g., Beugelsdijk & itz, Gomez, & Spencer, 2000). Over time, this work Mudambi, 2013; Hakanson & Ambos, 2010), eco- has been enriched by many contributions that have nomic (e.g., Ghemawat, 2001), and others. further developed the construct, expanding and Since its introduction in the literature in the mid- modifying its conceptualization, introducing new 1990s (Kostova, 1996, 1997), the construct of ways of operationalization and measurement, and institutional distance has gained prominence in incorporating it in hundreds of studies of different international business research (e.g., Aguilera & international business phenomena (e.g., Bae & Grøgaard, 2019; Bae & Salomon, 2010; Berry, Solomon, 2010; Berry et al., 2010; Gaur & Lu, Guille ´ n, & Zhou, 2010; Beugelsdijk, Ambos, & Nell, 2007; Gaur, Delios, & Singh, 2007; Xu, Pan & 2018a; Fortwengel, 2017; Jackson & Deeg, 2019; Beamish, 2004). Zaheer, Schomaker, & Nachum, 2012). Broadly The proliferation of deﬁnitions, operationaliza- deﬁned as the difference between the institutional tions, and proposed theoretical effects, however, proﬁles of two countries, typically the home and has also raised concerns about the tightness and the host country of an MNC (Kostova, 1996), rigor of this construct and the comparability of institutional distance has quickly become one of institutional distance research across studies. A the most widely used types of distance in this number of scholars have been troubled by such research. The interest in institutional distance has somewhat undisciplined diversity and the potential been triggered by the rapid expansion of MNCs to problems it might create, and have offered ideas of markets that are substantially different from their how to strengthen this research, conceptually and home countries. With increased globalization, methodologically (Bae & Salomon, 2010; Berry developed country MNCs are ﬁnding themselves et al., 2010; Beugelsdijk et al., 2018a; Fortwengel, in unfamiliar territories, as they enter emerging 2017; Hotho & Pedersen, 2012; Philips, Tracey, & markets and developing and transition economies. Karra, 2009; Zaheer et al., 2012). We too recognize These markets are characterized by uncertainty and that, at the extreme, such a broad and unscripted ambiguity, high economic and political risks, approach may create the sense that institutional unusual complexity, and major deﬁciencies, collec- distance is a ‘‘catch all’’ construct simply substitut- tively termed ‘‘institutional voids.’’ (Khanna, ing for country. At this point in time and in this Palepu, & Sinha, 2005). Likewise, a growing num- context, it would be beneﬁcial to have a critical ber of emerging market MNCs are aggressively look at institutional distance research and to try to expanding to the most competitive markets in the streamline its many different strands and world, which often operate under very different approaches into a more cohesive view. economic systems and institutional rules (Fortune, Our objectives in this review paper are three-fold. 2018). Even if they do not directly invest abroad, The ﬁrst it to take stock of the growing literature on many companies are participants in global produc- institutional distance by identifying the major tion networks, which indirectly expose them to institutional theory traditions employed, the ways multiple foreign environments (Levy, 2008). Thus, in which institutional distance has been conceptu- understanding cross-country differences and their alized and measured, and the theoretical mecha- impact on business, and learning how to navigate nisms proposed. The second is to synthesize and successfully across diverse environments have analyze this literature by identifying robust ﬁnd- become front-and-center tasks for global managers. ings on the impact of institutional distance on As argued in the original research introducing the various organizational outcomes, including loca- institutional lens as an alternative to culture (Kos- tion choice, entry mode, performance, and others, tova, 1996, 1997), institutional distance provides a as well as gaps and problematic areas in this work. broader view of national contexts, encompassing The third is to offer insights and speciﬁc actionable not only cultural but also regulatory and cognitive recommendations for a more disciplined and Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al rigorous approach to institutional distance research institutional distance research is that companies in the future. We combine several approaches: a doing business across national borders are embed- comprehensive review of the literature, rigorous ded and exposed to multiple and different institu- meta-analysis of existing empirical research, and tional environments in their home and host analysis and insights. The paper is based on a countries, and, as a result, face unique difﬁculties preliminary identiﬁcation of over 1000 studies that and risks (Kostova, 1999). The extent of such have used the construct of institutional distance differences (i.e., institutional distance) determines (published between 2002 and 2018), followed by an the speciﬁc challenges faced in each set of condi- in-depth review of a representative sample of 171 tions and affects companies’ strategic and manage- studies, and a meta-analysis of 137 empirical papers rial decisions and actions. from this sample. Three Schools of Thought Institutional theory is rich and multifaceted (Aguil- THEORETICAL PERSPECTIVES era & Grøgaard, 2019). As a result, institutions, IN INSTITUTIONAL DISTANCE RESEARCH institutional embeddedness, and institutional dis- The construct of institutional distance is rooted in tance have been deﬁned in a variety of ways, the notion of contextual embeddedness of organi- depending on the particular institutional perspec- zations, which recognizes the ‘‘embeddedness of tive taken. Following Hotho and Pedersen’s insight- economic activity in wider social structures’’ ful framework (2012), we distinguish between three (Dacin, Ventresca, & Beal, 1999: 318). Originating strands of institutional theory: organizational insti- in political economy and economic sociology, the tutionalism, institutional economics, and compar- concept of embeddedness was social scientists’ ative institutionalism, which propose different response to both the ‘‘under-socialized’’ economic conceptualizations of institutions, institutional dis- views of organizations that focused exclusively on tance, and the mechanisms by which it affects resources and transactions, while ignoring the various outcomes. Institutional distance work has social aspect of markets, and the ‘‘over-socialized’’ drawn from all these perspectives, sometimes views that studied social processes without sufﬁ- explicitly specifying the perspective followed, and cient consideration of economic relations (Parsons, sometimes without a clear reference. This, we 1960; Polanyi, 1944). As Granovetter (1985) sug- believe, has led to some confusion and ambiguity, gests, economic activity occurs in on-going pat- which we will discuss in the critique section of the terns of social relations: ‘‘All market processes are paper. amenable to sociological analysis and …such anal- Organizational institutionalism is rooted in sociol- ysis reveals central, not peripheral features of these ogy. Here, institutions are viewed as relatively processes’’ (Granovetter, 1985: 505). Social struc- stable social structures composed of regulative, tures impact economic activity through a variety of cultural-cognitive, and normative elements that, mechanisms: structural (social ties between social together with associated activities and resources, actors); cognitive (symbolic representations and provide stability and meaning to social life (Meyer frameworks of meaning that affect interpretation & Rowan, 1977; Powell & DiMaggio, 1991; Selznick, and sense-making by economic actors); cultural 1957; Scott, 1995). Institutions determine not only (shared understandings, norms, belief systems, and what is legal but also ‘‘legitimate’’, i.e., accept- logics); and political (societal power structures and able and approved way of conducting certain the distribution of resources and opportunities) functions in a particular society; under pressures (Dacin et al., 1999; Zucker, 1987). for legitimacy in the broader institutional environ- Institutional theory in particular studies the ment, organizations belonging to the same organi- embeddedness of organizations in institutional zational ﬁeld become similar, or isomorphic, with environments (Hall & Soskice, 2001; Whitley, each other as they adopt those legitimate structures 1999; Jackson & Deeg, 2008, 2019; North, 1990; and practices, which over time assume a ‘‘taken for Scott, 1995, 2014). While institutions and institu- granted’’ status (Meyer & Rowan, 1977; Powell & tional embeddedness operate at different levels of DiMaggio, 1991; Selznick, 1957; Scott, 1995). analysis—from global, to ﬁeld, to organization, to The original deﬁnition of institutional distance industry, to interpersonal (Scott, 1995, 2014)—the (Kostova, 1996) drew from this perspective, specif- primary level employed in international business ically based on Scott’s (1995) ‘‘three pillars’’ con- research is the nation state. The central idea in ceptualization of institutions: regulatory (rules and Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al laws that exist to ensure stability and order in informal cultures affect market-seeking and efﬁ- societies), cognitive (established cognitive struc- ciency-seeking foreign direct investment in differ- tures in society that are taken for granted), and ent ways. Notably, informal distance tends to be normative (domain of social values, cultures, and more loosely deﬁned in this research tradition: for norms). Accordingly, institutional distance example, Zhu, Xia, and Makino (2015) introduce between two countries was deﬁned as the difference language differences as part of informal distance. between their regulatory, cognitive, and normative Although both organizational institutionalism institutions (Kostova, 1996). The main explanation and institutional economics suggest that institu- of why institutional distance matters here is that tional distance leads to higher costs of doing different countries have different institutions and, business abroad (e.g., Dikova, Sahib, & van Wit- therefore, different ways of conducting certain teloostuijn, 2010; Henisz & Williamson, 1999), functions that are viewed as ‘‘legitimate’’. When there is a fundamental difference between the companies do business across borders, they face a proposed explanatory mechanisms. Organizational challenge to not only learn new ways of conducting institutionalism emphasizes the legitimacy mecha- certain functions but also to satisfy multiple, nism whereby, in familiar institutional settings different, and possibly conﬂicting, legitimacy (e.g., their home country), organizations under- requirements and expectations. This creates ten- stand the existing institutional order and can more sions externally, between the organization and its easily comply with the legitimacy requirements external legitimating environment (e.g., a particu- and expectations, while, in unfamiliar, particularly lar host country), and internally, between organi- ‘‘distant’’, environments (e.g., host country), com- zational units located in different countries and panies have limited knowledge and understanding therefore abiding by different institutional rules of how things are and should be done to establish (Kostova & Zaheer, 1999). and maintain an effective and legitimate operation Institutional economics has its roots in the eco- (Kostova & Zaheer, 1999; Eden & Miller, 2004;Xu nomics discipline. Institutions are deﬁned as ‘‘the & Shenkar, 2002). There is also the risk of internal humanly devised constraints that structure human tensions between organizational units residing in interaction’’ and are categorized into formal (rules, different countries, as they try to work with the laws, constitutions) and informal (norms of behav- external institutional arrangements in their respec- ior, conventions, and self-imposed codes of con- tive country (Kostova & Roth, 2002). Furthermore, duct) (North, 1990: 3). Formal institutions there is an additional difﬁculty resulting from the determine the rules that govern economic activity different treatment that foreign companies get and thus reduce uncertainty, risk, and transaction from local actors due to their ‘‘foreignness’’ (e.g., costs. Informal institutions, too, help coordinate Mezias, 2002). In summary, institutional distance economic action and become particularly impor- here leads to higher costs and risks because of lack tant in the absence of strong formal market insti- of understanding of the institutional order, inabil- tutions. Accordingly, scholars have considered two ity to simultaneously adjust to institutional types of institutional distance: formal and infor- requirements in multiple countries, challenges in mal. As an example, Abdi and Aulakh (2012) establishing external legitimacy, and increased distinguish between formal institutional distance internal and external complexity. (i.e., differences between the formal institutions The emphasis in institutional economics is not such as existence and enforcement of market on legitimacy, liability of foreignness, and adapta- supporting rules) and informal institutional dis- tion, but on the differing quality of institutional tance (i.e., differences between the shared norms, environments between countries, and on the dif- values, practices, and frames of interpretation in ferent degree to which the existing institutions in a two countries). Estrin, Baghdasaeyan, and Meyer given country support effective economic activity (2009) view formal institutional distance as con- and coordination between economic actors. There cerning laws and rules that inﬂuence business is a ‘‘sign’’ to the distance in this perspective. The strategies and operations, and informal institu- increase in transaction costs depends not only on tional distance concerning rules embedded in val- the countries involved but also on the direction of ues, norms and beliefs. Slangen and Beugelsdijk foreign expansion (Trapczynski & Banalieva, 2016). (2010) use the distinction between formal and Less developed formal institutions in a given informal institutional distance to show how differ- country tend to increase transaction costs due to ences in formal governance regulations and the ineffectiveness of market mechanisms of Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al economic coordination. They also imply more emphasis in comparative institutionalism is on the opaque and unstable institutional rules that are differences between conﬁgurations of types of cases difﬁcult to make sense of and follow (Khanna & at the country level (Jackson & Deeg, 2008, 2019)or Palepu, 1997, 2000). The institution-related chal- between institutional clusters as illustrated by the lenges are greater for companies moving from a term varieties of capitalism (Judge, Fainschmidt, & more to a less institutionally developed environ- Lee Brown III, 2014; Hotho, 2013). The impact of ment than the other way around. While at home institutional differences from this perspective is such companies are generally used to relying on discussed in terms of the overall ‘‘ﬁt’’ between formal institutions to carry out their economic ‘‘ﬁrm-speciﬁc resources’’ and ‘‘the particular activities, expanding into less developed host resource environments of a host country’’ (Jackson countries requires new understanding of the role & Deeg, 2008: 543). Recognizing the interdepen- of informal institutions, and learning new strate- dence between the various institutional aspects is gies and tactics for functioning under such condi- an appealing advantage of this approach as it allows tions. Institutional distance is also an issue in the the capturing of cross-country ‘‘differences not of opposite direction, when companies are moving degree but of kind’’ (Jackson & Deeg, 2019: 5). At from less to more institutionally developed envi- the same time, it is a departure from traditional ronments. In this case, the challenges are more treatment of institutional distance and presents related to the organization’s ability to learn how to some theoretical and empirical challenges to dis- function under stricter and more mature institu- tance scholars. tional frameworks without the ‘‘help’’ of informal- Although not explicitly stated in their paper, we ity. In summary, distance in institutional view Berry et al.’s (2010) work as an attempt to economics has a differential effect, depending on bridge traditional comparative institutionalism the home and host countries’ institutional quality, with distance research. To do that, similar to the the speciﬁc sources of the related costs and risks, comparativist tradition, the authors conceptualize the types of organizational outcomes that might be institutions as a system of arrangements in nine affected the most, and the possible remedies for different facets of a country’s socio-economic life overcoming the challenges of distance. that logically hang together: politics, ﬁnance, Comparative institutionalism emphasizes the sys- economy, demography, administration, culture, tem of interdependent institutional arrangements knowledge, global connectedness, and geography. in different areas of socio-economic life in a given Unlike comparative institutionalism, though, they country (e.g., economic models, legal frameworks, do not collapse the construct to an institutional educational systems, national innovation systems, ‘‘variety’’ or ‘‘type’’. Instead, they suggest theorizing levels of development, role of the state, labor). This at the dimension level to capture possible differen- theory proposes typologies of national institutional tial effects. At the same time, to stay truer to the systems, such as the liberal market economy or the conﬁgurational approach, they depart from tradi- coordinated market economy (Hall & Soskice, tional methods of multidimensional operational- 2001; LaPorta, Lopez-de-Silanes, Shleifer, & Vishny, izations (e.g., Euclidean distance), proposing 1998; Nelson & Rosenberg, 1993; Whitley, 1999). instead the Mahalanobis method, which accounts Institutions reﬂecting the different facets of a for the interdependence between the different country’s institutional environment are seen as institutional dimensions (Berry et al., 2010). Over- complementary and in combination with each all, Berry et al.’s (2010) work has been well received, other. They exist in national conﬁgurations that especially for the proposed Mahalanobis method- generate a particular systematic logic of economic ology (e.g., Kang, Lee, & Ghauri, 2017; Lindner, action and reﬂect the overall institutional ‘‘charac- Muellner, & Puck, 2016). However, the key com- ter’’ of the nation (Jackson & Deeg, 2008, 2019). parative institutional theoretical ideas behind Berry In the context of cross-country diversity, this et al.’s (2010) work have not been sufﬁciently perspective is distinct from the previous two, in developed and employed in subsequent IB research. that conceptually it captures difference more than Use of the Three Perspectives distance. Both organizational institutionalism and For a more accurate assessment of the salience of institutional economics conceive of home- and the different institutional schools of thought in host-country diversity in terms of linear differences distance research, we relied on the subsample of between discrete institutional parameters or vari- 137 empirical studies included in our meta- ables (Jackson & Deeg, 2008, 2019). In contrast, the Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al analysis. We evaluated the perspective used by each Overall, organizational institutionalism has been paper in our sample: that is, each of the 137 the predominant perspective in this literature (38 empirical studies was classiﬁed in one or two of the of the 101 papers in our sample), followed by above traditions based on the primary theoretical institutional economics (28 of the 101 papers), and mechanisms discussed and hypothesized (see the an eclectic combination of different perspectives, ‘‘Appendix’’ for more details). Although the usually organizational institutionalism and institu- grounding of the research in a particular theoretical tional economics (22 of the 101 studies). Compar- tradition was not always clear and/or explicit, and ative institutionalism, while increasingly used in in many cases authors mixed multiple strands of international business research, has hardly been institutional theory, we were able to reach a applied as a theoretical lens in distance literature. consensus on this question through a rigorous Hence, it is not included as a stand-alone perspec- coding procedure. The coding was carried out by tive in Table 1. three independent scholars, followed by additional In our view, organizational institutionalism has deliberations in case of disagreement. Table 1 pro- received the most attention, partly because it was vides an overview of institutional distance studies the ﬁrst to be used in institutional distance research that have their theoretical grounding in the three (Kostova, 1996; Kostova & Roth, 2002; Busenitz institutional perspectives. et al., 2000). In addition, it provides a broad As seen from the table, the three perspectives framework for studying institutional context and have not been equally represented in this literature. cross-country differences, giving researchers many It should be noted that, of the 137 studies in the choices to pick country-level variables that reﬂect sample, institutional distance was part of the main various aspects of national environments and suit model in 101 papers. The other 36 studies used their research questions, ranging from laws and institutional distance as a control variable; thus regulations, to cognitive structures and social authors were less deliberate in clearly positioning knowledge, to social norms and cultural values. their discussion of distance in any particular theo- This approach allows the examination of institu- retical frame. Also, 13 of the 101 studies that tional effects on a wide range of outcomes related examined institutional distance used none of the to MNC strategies and organizational actions. The three institutional theories discussed above, possibility of tailoring the application to a speciﬁc employing instead other theoretical lenses, for issue by selecting relevant institutional parameters example, learning theory (e.g., Perkins, 2014; Pow- further increases the capacity to explain outcomes ell & Rhee, 2016). of interest. Another facilitating factor for the use of organizational institutionalism is the growing Table 1 Theoretical tradition in institutional distance research Organizational Institutional Combination Other Total institutionalism economics Org. inst. and Other Other Controlled Inst. econ. theory No. of papers in a speciﬁc tradition 38 28 17 5 13 36 137 Use of unidimensional term Generic ‘‘institutional distance’’ 12 14 9 1 8 27 72 Use of multidimensional pillars Formal distance only 0 3 0 0 0 0 3 Informal distance only 0 0 0 0 0 0 0 Formal + informal distance 3 9 6 0 1 3 22 Regulatory distance only 4 2 0 3 3 2 14 Normative distance only 1 0 0 0 0 0 1 Cognitive distance only 0 0 0 0 0 0 0 Regulatory and normative distance 7 0 2 1 1 3 14 Regulatory and cognitive distance 0 0 0 0 0 0 0 Normative and cognitive distance 1 0 0 0 0 0 1 Reg. and Norm. and Cogn. distance 10 0 0 0 0 1 11 Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al availability of reliable, accessible, and often longi- Rasheed, 2018; Jung & Lee, 2018) or various subsets tudinal secondary data, measuring various institu- as control variables (e.g., Schwens, Zapkau, tional facets provided by the World Bank and other Brouthers, & Hollender, 2018; Valentino, Schmitt, institutions (e.g., Heritage Foundation). As will be Koch, & Nell, 2018). None of these studies, how- discussed below, the easy access to data on these ever, are clearly positioned in the comparative dimensions appears to be an important factor in institutionalism theoretical tradition, because they the more common use of those institutional do not theorize at the level of the conﬁguration. dimensions, for which there is an abundance of Theoretically, it is difﬁcult to link the notion of data. distance with the conﬁgurational idea of compar- The use of the institutional economics perspec- ative institutionalism, which is conceptually closer tive has increased steadily, especially in the last few to difference rather than distance. Shifting from years: 21 of 28 papers in this camp have been difference to distance is not as easy as the similar published in the last 5 years. We attribute this to wording might make it appear. Fortwengel (2017)is the rise of emerging markets and their role in a recent attempt to strengthen the theoretical international business, and to the growing research underpinnings of comparative institutionalism in devoted to studying that context, which brings distance research. He proposes four characteristics forth the issues of quality of institutional environ- of institutional conﬁgurations—coordination, ments, ‘‘institutional voids’’, and substitutability of strength, thickness, and resources—and conceptu- formal and informal institutions (e.g., Khanna alizes distance as the difference between these et al., 2005; Peng, Wang, & Jiang, 2008). Institu- characteristics. Overall, the application of this tional economics is well suited to studying those perspective in distance research is in its infancy contexts. In addition, institutional economics and raises serious questions about the appropriate- applications have also beneﬁted from the availabil- ness of comparative institutionalism in this line of ity of secondary institutional data that can be used work. Due to the small number of associated to quantify formal and informal institutions, for studies, we could not include them in the meta- example, World Bank Governance Indicators, the analysis and Table 1. Economic Freedom Index, and the Global Compet- itiveness Index (see Table 3 below). Overall, in later METHODOLOGICAL APPROACHES work, we ﬁnd that organizational institutionalism IN INSTITUTIONAL DISTANCE RESEARCH has been gradually supplemented by institutional In addition to the diversity in theorizing on economics. While the volume of papers applying institutional distance, this literature is also charac- organizational institutionalism has been relatively terized by diversity in methodological approaches. stable over time, its relative share in all distance Below is a brief review of the most common research has gone down from 33% from 2002 to approaches employed. 2014 to 25% in the period after 2014. The use of comparative institutionalism in dis- Operationalization tance research is rather limited, despite the growing Table 1 shows that operationalizations vary, gener- interest of international business scholars in this ally depending on the particular institutional per- perspective (Aguilera & Grøgaard, 2019; Jackson & spective employed. Most studies take a Deeg, 2019). There are a few studies that draw on multidimensional approach. Research following Berry et al. (2010) and apply the Mahalanobis organizational institutionalism typically utilizes methodology for calculating institutional distance. Scott’s (1995) ‘‘three pillars’’ of regulatory, cogni- They vary widely, with the type and number of tive, and normative institutions, and constructs institutional dimensions considered ranging from distance measures accordingly. Many papers use a the full set of nine (Kang, Lee, & Ghauri, 2017)toa separate measure for each of the three distances— subset of a selected few or even a single dimension regulatory, cognitive, and normative distances (e.g., Pinto, Ferreira, Falaster, Fleury, & Fleury, (e.g., He, Brouthers, & Filatothev, 2013)—but some 2017). Lindner, Muellner, and Puck’s (2016) study, collapse normative and cognitive distances and which uses four of the nine dimensions related to construct one measure to capture both of them the regulatory and normative domains, exempliﬁes together (e.g., Gaur & Lu, 2007; Jensen & Szulanski, the typical application. There are also studies that 2004). A number of papers focus on the regulatory select one dimension, mostly administrative dis- and normative distances only (e.g., Ang, Benischke, tance (e.g., Ahrens et al., 2018; Brown, Yas ¸ar, & Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al & Doh, 2015; Madsen, 2009), and construct sepa- market-supporting institutions and measure it rate measures for each of them (Gaur & Lu, 2007; through a single index. Zhou et al. (2016) also use Gaur et al., 2007; Xu et al., 2004). Among the three a single index to measure institutional distance, distances, regulatory distance is the one most focusing on business-related laws and regulation, frequently studied. Scott himself has always pre- which they suggest reﬂect the ‘‘rules of the game in sented the pillars as analytic conceptual tools, a society’’. Hence, a signiﬁcant proportion of the while explicitly acknowledging that the elements papers employing organizational institutionalism associated with the pillars are often jointly at work do not sufﬁciently leverage the three pillars dis- and may change over time (Scott, 2014). cussed by Scott (1995). Even when they use Scott’s Research grounded in institutional economics framework in the theoretical development, they distinguishes between formal and informal institu- rarely utilize the three aspects of institutional tions (North, 1990, 1991) and constructs separate distance in operationalizing and measuring the distance measures for each of them (e.g., Abdi & construct. This is also common in papers grounded Aulakh, 2012; Dikova et al., 2010; Estrin et al., in institutional economics, which either use a 2009). Some papers examine only the effects of generic term of institutional distance without formal institutional distance (e.g., Zhou, Xie, & specifying the nature of the different institutions, Wang, 2016) or informal institutional distance or, even when they do so theoretically, settle on (e.g., Sartor & Beamish, 2014; Schwens, Eiche, & using only one type of institutions empirically, Kabst, 2011) on their outcome variables, and thus usually formal institutions. construct one measure for that particular type. Measurement There are exceptions to the multidimensional Measures of institutional distance are quite diverse. operationalization of institutions and institutional They vary between multidimensional collapsed distance. As seen in Table 1, some papers take more into single-index (e.g., Pinto et al., 2017), single- of a reductionist approach and measure institu- index (e.g., Somaya & McDaniel, 2012), absolute tional distance as a unidimensional construct (e.g., difference (e.g., Liou, Chao, & Yang, 2016; Liou, Dellestrand & Kappen, 2012; Lahiri, Elango, & Chao, & Ellstrand, 2017), weighted absolute-differ- Kundu, 2014). Most of these studies use institu- ence (Chao & Kumar, 2010), Euclidean distance tional distance as a control (27 of the 72 studies), (e.g., Gaur & Lu, 2007), Mahalanobis distance (e.g., although there are a number of papers where Berry et al., 2010; He et al., 2013), positive and institutional distance is a main variable that follows negative distance measures (e.g., Trapczynski & the same unidimensional approach. Twelve of the Banalieva, 2016), and other variations. Table 2 38 studies classiﬁed as organizational institutional- presents a summary of the data sources used for ist, and 14 of the 28 rooted in institutional the different distance operationalizations. economics, take a unidimensional approach. In Initially, institutional distance (grounded in most of these papers, the authors recognize the organizational institutionalism) was measured multidimensionality of the construct in their the- through a speciﬁcally constructed survey instru- oretical discussions, but reduce it to one dimension ment that captured its three dimensions, regula- when it comes to operationalization, usually choos- tory, cognitive, and normative (Kostova, ing an institutional variable that is easy to explain 1996, 1997). In addition to capturing all three and for which there are readily available data. pillars, this approach was argued to be superior to For example, in their study of cross-border alternative country-level measures because the sur- acquisitions, Lahiri et al. (2014) discuss both formal vey was anchored in a particular issue domain: and informal institutions when theorizing on the quality and quality management, assessing the institutional environment and institutional dis- regulations, social knowledge, and cultural norms tance, but use only formal institutions to represent related to the speciﬁc issue of quality. The same institutional distance, stating that ‘‘institutional approach was followed by other scholars who distance measures the difference in the develop- developed surveys to measure the favorability of ment of formal institutions between acquirer and institutional environments with regard to other target nation’’. Similarly, Gubbi, Aulakh, Ray, issues, for example, entrepreneurship (Busenitz Sarkar, & Chittoor (2010) state that ‘‘institutional et al., 2000) and market orientation (Kirca, Jay- distance captures the differences in normative, achandran, & Bearden, 2005). The issue-speciﬁc regulative, and cognitive constructs between two approach is consistent with organizational economies’’, but operationalize it as the strength of Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al Table 2 Operationalization of institutional distance by theoretical tradition (# of papers) Unidimensional Regulatory Normative Cognitive Formal Informal Total institutional distance distance distance institutional institutional distance (RD) (ND) distance distance World governance indicators 31 7 0 0 7 0 45 Economic Freedom Index 14 6 0 0 7 0 27 International country risk 20 0 0 3 0 5 guide Global competitiveness 311 0 0 0 0 14 report (RD) World competitiveness 27 0 0 1 0 10 yearbook (RD) Global competitiveness 0 0 14 0 0 0 14 report (ND) World competitiveness 00 7 0 0 2 9 yearbook (ND) Hofstede 0 0 0 6 0 15 21 Other 20 8 6 6 7 5 52 institutionalism, in particular with the notion of (2004) have been particularly inﬂuential in adopt- organizational ﬁeld, suggesting that countries ing this approach, as it suggested alternative sets of might be similar in some domains of economic items from the WCY and the GCR that could be and social life (e.g., rule-of-law), but signiﬁcantly used to measure regulatory and normative distance, different in other aspects (e.g., environmental respectively. The most glaring gaps in terms of protection). Measuring institutions and institu- using Scott’s three pillars relate to the cognitive tional distance by issue provides a more potent dimension. Many studies skip it altogether, espe- assessment of the institutional differences that cially when it comes to measurement, and half of really matter for the particular question under those that do provide measures on cognitive investigation. The alternative of using general distance use Hofstede’s cultural dimensions. For country-level measures such as regulatory quality example, Gaur et al. (2007) argue that cultural or rule of law, while meaningful for certain ques- distance is rooted in the cultural-cognitive dimen- tions, may be less informative for other speciﬁc sion of a nation’s institutional environment. Jensen research questions (Kostova, 1997). The subsequent and Szulanski (2004) operationalized institutional literature has departed from the domain-speciﬁc distance as cultural distance, and measured it using and survey-based measurement approach, using the Kogut and Singh cultural distance index (1988), instead a variety of more generic country-level arguing that it captures both the cognitive and measures based on secondary data to capture normative dimensions. whatever institutional dimensions are hypothe- Work in the institutional economics tradition sized in the theoretical models. This shift can most often uses data from WGI and the EFI. These partly be explained by the increased availability sources are typical for studies using a unidimen- and quality of such data. sional distance index, and are also commonly used In the organizational institutionalism tradition, to measure formal institutional distance in two- regulatory distance is most commonly measured dimensional operationalizations. Informal distance with World Governance Indicators (WGI) (World is measured primarily by Hofstede’s cultural dimen- Bank), the Economic Freedom Index (EFI) (Heritage sions (Hofstede, 1980, 2001), although there are Foundation), the World Competiveness Yearbook exceptions where scholars employ alternative cul- (WCY) (IMD), or the Global Competitiveness tural frameworks. For example, Estrin et al. (2009) Report (GCR) (World Economic Forum). A different use both Hofstede and GLOBE-based indexes to set of items from these same databases has been measure informal institutional distance. It is fair to used to measure normative distance. Studies by say that the typical institutional distance study in Gaur and Lu (2007), Gaur et al. (2007) and Xu et al. the institutional economics tradition measures Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al Table 3 Most used measures of institutional distance Type of Measure Data source distance Regulatory World Governance Indicators World Bank 1. Voice and accountability http://info.worldbank.org/governance/wgi/#home 2. Political stability and absence of violence 3. Government effectiveness 4. Regulatory quality 5. Rule of law 6. Control of corruption Economic Freedom Index Heritage Foundation 1. Property rights https://www.heritage.org/index/ 2. Freedom from corruption 3. Fiscal Freedom 4. Government spending 5. Business freedom 6. Labor freedom 7. Monetary freedom 8. Trade freedom 9. Investment freedom 10. Financial freedom Global Competitiveness Report World Economic Forum 1. Anti-trust policy in your country effectively promotes https://www.weforum.org/reports/the-global- competition competitiveness-report-2017-2018 2. The legal system in your country is effective in enforcing Item selection introduced by Xu et al. (2004) commercial contracts 3. Private business can ﬁle suits at independent courts if there is a breach of trust on the part of the government 4. Citizens of your country are willing to accept legal means to adjudicate disputes rather than depending on physical force or illegal means 5. The chance that the legal and political institutions drastically chance in the next ﬁve years is low 6. Your country’s police are effective in safeguarding personal security so that this is an important consideration in business activity World Competitiveness Yearbook IMD Business School 1. Fiscal policy https://www.imd.org/wcc/world-competitiveness- 2. Antitrust regulation center-rankings/World-competitiveness-yearbook- 3. Political transparency ranking/#WCO 4. Intellectual property protection Item selection introduced by Gaur and Lu (2007) and 5. Judiciary system efﬁciency Gaur et al. (2007) 6. Rarity of market domination in key industries 7. Fiscal policy (inﬂation) Normative Global Competitiveness Report World Economic Forum 1. Product design capability is heavily emphasized https://www.weforum.org/reports/the-global- 2. Firms in country pay close attention to customer satisfaction competitiveness-report-2017-2018 3. Staff training is heavily emphasized Item selection introduced by Xu et al. (2004) 4. Willingness to delegate authority to subordinates is generally high 5. Compensation policies link pay closely to performance 6. It is more common for owners to recruit outside professionals than to appoint children or relatives 7. Corporate boards are effective at monitoring management performance and represent shareholder interests Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al Table 3 (Continued) Type of Measure Data source distance Global Competitiveness Yearbook IMD Business School 1. Adaption of political system to economic challenges https://www.imd.org/wcc/world-competitiveness- 2. Adaption of government policies to new economic realities center-rankings/World-competitiveness-yearbook- 3. Transparency of government toward its citizens* ranking/#WCO 4. Political risk rating Item selection introduced by Gaur & Lu (2007); Gaur 5. Degree to which bureaucracy hinders economic et al. (2007) development Cognitive Hofstede Hofstede (2001) 1. Power distance http://geerthofstede.com/research-and-vsm/ 2. Individualism/collectivism dimension-data-matrix/ 3. Masculinity/femininity 4. Uncertainty avoidance 5. Long-term orientation/short-term orientation 6. Indulgence/restraint GLOBE House et al. (2004) 1. Performance orientation http://globeproject.com/study_2004_2007#data 2. Assertiveness 3. Future orientation 4. Humane orientation 5. Institutional collectivism 6. Institutional collectivism 7. Gender egalitarianism 8. Power distance 9. Uncertainty avoidance Formal Same as regulatory institutional distance – Informal Same as cognitive institutional distance – *item is taken from Country Risk ratings: Euromoney formal distance, using either the WGI or the EFI, (institutional economics) as well as cognitive and and informal distance using Hofstede’s cultural normative distance (organizational institutional- dimensions. The latter is commonly operational- ism) is more problematic, because it is not true to ized using the Kogut and Singh index of cultural the conceptual essence of these constructs. Hofst- distance (Kogut & Singh, 1988). Table 3 presents ede’s indexes represent cultural value dimensions, the different measures and sources of data used in while the cognitive institutional aspect is supposed institutional distance research. to capture the ‘‘taken for granted’’ habitual ways of doing certain things in a society. An extreme Concerns example of how these might be disconnected can Our analysis of operationalization and measure- be offered around the issue of corruption. Most ment of institutional distance suggests several countries would not view corruption as ‘‘the right points of attention, if not concern. First, the same thing to do’’ (value judgment), but in many it is data are used to measure institutional variables that ‘‘how things get done around here’’ (cognitive belong to different theoretical traditions. In the habituality). Even more problematic is the use of case of regulatory distance (organizational institu- cultural indexes to measure informal institutions. tionalism) and formal distance (institutional eco- In North’s framework, informal institutions are nomics), this is less of a problem given that Scott important because they can serve as complements, himself builds this link, referring to North when or, in some cases, as substitutes for weak formal discussing regulatory distance (Scott, 1995, 2014). institutions. Thus, the function of informal insti- However, the interchangeable use of Hofstede’s tutions is to help coordinate economic and social cultural dimensions in measuring informal Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al transactions and interactions in a society, especially In light of the proliferation of theoretical and in the absence of strong formal institutions. Cul- methodological approaches discussed above, we ture, in Hofstede’s framework, has not been con- were also interested in assessing, to the extent ceptualized as either a formal or an informal market possible, whether particular theoretical perspec- coordination mechanism. The level of power dis- tives, operationalizations, and measurements are tance or masculinity, for example, is not concep- more potent than others in providing insights into tually linked to facilitating economic transactions. certain organizational outcomes. What sources of Also, in many articles within the organizational data seem to be more informative in capturing the institutionalist tradition, regulatory and normative effects of institutional distance? Are results sensi- distance have both been measured using a variety tive to the use of different measurement methods of databases. This raises the more fundamental (e.g., Euclidean vs. Mahalanobis)? In this effort, we question of whether results obtained for the same supplemented our literature review with a rigorous dependent variable depend on the particular mea- meta-analysis of the empirical studies in the sam- sure used. As Beugelsdijk et al. (2018a) show, the ple. A total of 137 papers were included, providing correlation between distance indexes based on WGI sufﬁcient sample size for this technique. A list of and EFI is low, suggesting that these databases these studies can be found in the ‘‘Appendix’’. cannot be used interchangeably, thus raising ques- Overall, most of the papers examined the impact tions on the sensitivity of empirical ﬁndings. of institutional distance on ﬁrm performance and internationalization, including different stages of the internationalization process, such as location MAIN FINDINGS IN INSTITUTIONAL DISTANCE choice, and entry and establishment mode. To our RESEARCH surprise, in our sample, there were fewer papers A key question in our study concerned the various (not sufﬁcient for conducting a meta-analysis) that outcomes that have been linked to institutional linked institutional distance to management and distance in research. We identiﬁed 20 different organizational issues such as transfer of practices or outcomes in the full sample of 171 papers. The headquarters control (e.g., Kostova & Roth, 2002; most investigated outcome is ﬁrm performance Dellestrand & Kappen, 2012) Speciﬁcally, of all the (e.g., Gaur & Lu, 2007; Lazarova, Peretz, & Fried, statistical relationships included in our meta-anal- 2018; Shirodkar & Konara, 2017). Other frequently ysis, 50% were on performance, closely followed by examined outcomes include ownership structure entry mode (full or partial ownership) (39%). The (e.g., Ilhan-Nas, Okanb, Tatogluc, Demirbag, number of location choice (5%) and establishment Woode, & Glaisterf, 2018; Powell & Rhee, 2016; mode (greenﬁeld or acquisition) (6%) studies is Xu et al., 2004), location choice (e.g., Madsen, rather limited. Thus, we could only evaluate the 2009; Romero-Martinez, Garcia, Muina, Chidlow, methodological questions with respect to opera- & Larimo, 2019; Xu & Shenkar, 2002), headquar- tionalization and measurement in studies on per- ters–subsidiary relationship (e.g., Dellestrand & formance and entry mode. For that reason, we Kappen, 2012; Li, Jiang, & Shen, 2016; Valentino present the results for performance and entry mode et al., 2018), and entry mode (e.g., Brouthers, in the main text, and delegate detailed results on Brouthers, & Werner, 2008; Ang et al., 2015). location choice and establishment mode to the Cross-border mergers and acquisitions deal aban- ‘‘Appendix’’. donment/completion (e.g., Bhaumika, Owolabib, & Sarmistha, 2018; Dikova et al., 2010), establish- MNC and Subsidiary Performance ment mode/type (e.g., Arslan, Tarba, & Larimo, As shown in Table 4, we ﬁnd that institutional 2015; Estrin et al., 2009), and cross-border transfer distance generally has a negative effect on ﬁrm of organizational practices (e.g., Jensen & Szulan- performance, including almost all types of perfor- ski, 2004; Kostova, 1999) have also been studied a mance used, i.e., accounting, market, and survival few times. Other outcomes have only been exam- measures. Survival of a foreign market entry expe- ined once or twice, for instance, MNEs’ legitimacy rienced the most detrimental effect of institutional and isomorphism (e.g., Kostova & Zaheer, 1999; distance. Market-based performance was the only Salomon & Wu, 2012). It can therefore be con- type that was not signiﬁcantly impacted by insti- cluded that institutional distance has been tutional distance (although the sign of the effect employed in a wide variety of studies. was also negative). Interestingly, the negative effect of institutional distance on performance is about Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al Table 4 HOMA results for institutional distance and performance Predictor Kn Mean (p value) SE Q test I Pearson product-moment correlation (r) and partial correlation coefﬁcients (r ) xy.z Institutional distance to performance 467 1,370,095 - 0.024 (0.000) 0.004 7676.26 0.94 Unidimensional institutional distance to performance 189 980,011 - 0.022 (0.001) 0.007 5808.56 0.97 Regulatory distance to performance 114 240,834 - 0.038 (0.000) 0.006 770.05 0.85 Normative distance to performance 60 87,648 - 0.021 (0.074) 0.011 533.23 0.89 Cognitive distance to performance 12 2,710 - 0.012 (0.596) 0.019 15.70 0.17 Formal distance to performance 50 29,872 0.001 (0.925) 0.014 212.09 0.76 Informal distance to performance 42 29,020 - 0.028 (0.012) 0.011 107.80 0.60 Institutional distance measurement Euclidean distance 25 13,997 - 0.036 (0.001) 0.011 33.96 0.23 Kogut and Singh Index 101 202,732 - 0.053 (0.000) 0.016 3908.96 0.97 Mahanalobis 22 33,104 - 0.118 (0.000) 0.022 196.13 0.88 Differences 96 185,595 - 0.009 (0.059) 0.005 305.70 0.68 Other/unknown 223 934,667 - 0.009 (0.030) 0.004 1938.76 0.88 Data sources World governance indicators 89 797,747 - 0.018 (0.062) 0.010 5308.04 0.98 Economic Freedom Index 76 207,254 - 0.036 (0.000) 0.006 226.15 0.66 International country risk guide 16 21,626 0.007 (0.618) 0.014 41.49 0.59 Global competitiveness report (item set RD) 42 49,617 - 0.019 (0.019) 0.008 111.81 0.62 World competitiveness yearbook (item set RD) 16 37,545 0.033 (0.140) 0.023 145.85 0.88 Global competitiveness report (item set ND) 39 49,260 - 0.004 (0.476) 0.005 50.79 0.21 World competitiveness yearbook (item set ND) 18 37,977 - 0.041 (0.116) 0.026 239.43 0.92 Hofstede 39 11,173 - 0.002 (0.895) 0.018 116.49 0.66 Other 115 152,390 - 0.039 (0.000) 0.007 647.46 0.82 Performance types Accounting performance 182 973,417 - 0.011 (0.000) 0.004 1520.55 0.88 Market performance 45 50,431 - 0.002 (0.805) 0.008 128.58 0.64 Survey performance 91 15,069 - 0.037 (0.032) 0.017 392.48 0.77 Survival 38 89,312 - 0.058 (0.000) 0.015 556.50 0.93 Other 111 241,866 - 0.033 (0.014) 0.013 4077.05 0.97 Performance identity MNC 190 263,005 - 0.009 (0.031) 0.004 774.12 0.75 Subsidiary 248 1,067,968 - 0.040 (0.000) 0.000 6731.96 0.96 Published or not Published 428 1,345,450 - 0.024 (0.000) 0.004 7624.26 0.94 Unpublished 39 24,645 - 0.025 (0.035) 0.011 50.67 0.21 Multiple countries only Institutional distance to performance 213 869,122 - 0.009 (0.028) 0.004 1739.74 0.88 Unidimensional institutional distance to performance 101 681,564 - 0.000 (0.952) 0.005 1216.17 0.92 Regulatory distance to performance 22 129,475 - 0.006 (0.477) 0.008 118.96 0.81 Normative distance to performance 10 3089 - 0.018 (0.330) 0.018 8.94 0.00 Cognitive distance to performance – – – – – – Formal distance to performance 39 26,748 - 0.021 (0.156) 0.015 165.28 0.76 Informal distance to performance 36 27,006 - 0.034 (0.004) 0.012 91.81 0.60 four times stronger (i.e., more negative) on sub- the effect of formal distance (institutional eco- sidiary performance (b = - 0.040; p = 0.000) than nomics) is insigniﬁcant (b = - 0.001; p = 0.925), on the performance of the MNC as a whole the effect of regulatory distance (organizational (b = - 0.009; p = 0.031). This ﬁnding is consistent institutionalism) is negative and signiﬁcant with a recent study on cultural distance (Beugels- (b = - 0.038; p = 0.000). We also ﬁnd a signiﬁcant dijk et al., 2018b). negative effect when institutional distance is mea- Furthermore, we observe some interesting differ- sured unidimensionally (b = - 0.022; p = 0.001) ences depending on the theoretical tradition and (often using the same indicators as for formal and institutional dimensions used. Speciﬁcally, while regulatory distance). For a more reﬁned analysis, we Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al further replicated the test on a smaller sub-sample correlation between the different institutional of papers that used both multiple home and dimensions (Berry et al., 2010). multiple host countries. The reason is that there The analysis of the impact of the data source used has been a concern in the literature (Brouthers, is less straightforward due to the variety in mea- Marshall, & Keig, 2016; van Hoorn & Maseland, sures and data sources, as well as the interchange- 2016) that studies which use one home and mul- able use of overlapping data for different tiple host countries might in fact be capturing institutional dimensions and variables. We do not ‘‘proﬁle’’ rather than ‘‘distance’’ effects. In those have a sufﬁcient number of studies to provide a cases, results are driven by the institutional char- comprehensive analysis of all possible methodolog- acteristics of the host country regardless of how ical effects slicing the sample by database, distance ‘‘distant’’ it is from the home country. This is dimension, and sample structure used. What we especially relevant when the focus is on regulatory can say, however, is that, speciﬁcally for those and formal institutions. Interestingly, as seen in distance dimensions that are most at risk of Table 4, in this smaller and stricter subsample, we conﬂating distance and proﬁle effects (i.e., formal, found no signiﬁcant performance effect for formal, regulatory, and unidimensional), we ﬁnd regulatory, and unidimensional measures of insti- notable differences in results depending on the tutional distance. There is a negative and signiﬁ- data source used. For example, there is a negative cant effect of informal distance (most often and signiﬁcant coefﬁcient for distances using the measured by Hofstede’s cultural dimensions) on WGI (b = - 0.018; p = 0.062), EFI (b = - 0.036; performance, again consistent with previous meta- p = 0.000), and the regulatory distances using the analyses on cultural distance and performance GCR item set (b = - 0.019; p = 0.019). In contrast, (Beugelsdijk et al., 2018b; Magnusson, Baack, both the regulatory distances using the WCY Zdravkovic, Satub, & Amine, 2008). We believe (b = 0.033; p = 0.140), and the International Coun- that these results are among the most interesting try Risk (ICR) guide (b = 0.007; p = 0.618) ﬁnd a analytical ﬁndings in our review, showing that positive but insigniﬁcant coefﬁcient. methodological approaches, including sample Entry Mode structure (number of home and host countries), Table 5 presents summary results for the relation- and the particular measurement approach ship between institutional distance and entry employed, matter greatly for the results, even to mode. Entry mode refers to the degree of ownership the extent that they may render institutional taken by an MNC in a foreign venture. In the distance insigniﬁcant. primary studies, entry mode is most frequently The meta-analytical technique allowed us to also measured as a continuous variable or percentage of test for possible contingency effects of the way ownership (167 correlations; e.g., Malhotra & Gaur, institutional distance is measured in terms of both 2014), followed by a dummy variable taking the method and data source. Table 4 shows that the value of 1 for full ownership and 0 for partial (162 vast majority of the papers use either the Kogut and correlations; e.g., Gaur & Lu, 2007), and a categor- Singh index or another Euclidean distance index, ical variable of minority versus majority versus and that both approaches ﬁnd a negative and wholly-owned (35 correlations; e.g., Xu et al., signiﬁcant relationship with performance. Studies 2004). using the Mahalanobis distance (Berry et al., 2010) Similar to performance, we ﬁnd an overall neg- show the strongest negative relationship with per- ative and signiﬁcant relationship between institu- formance (b = - 0.118; p = 0.000). Studies that tional distance and entry mode. Greater simply take the difference between the home and institutional distance is associated with lower a host country score on an indicator (b = - 0.009; commitment in terms of degree of ownership, p = 0.059), or in which it is unclear what method is irrespective of the way entry mode is operational- used to measure distance, also have a negative and ized (dummy, continuous, or categorical) signiﬁcant relationahip (b = - 0.009; p = 0.030). It (b = - 0.029 and p = 0.000). Also similar to perfor- therefore appears that all these measurement meth- mance, we ﬁnd opposing results for formal distance ods are effective in capturing the relationship (insigniﬁcant with b = - 0.016 and p = 0.348), reg- between institutional distance and performance. ulatory distance (signiﬁcant with b = - 0.049 and The Mahalanobis method is perhaps preferable p = 0.005), and a unidimensional operationaliza- given its unique ability to also account for the tion of institutional distance (insigniﬁcant with Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al Table 5 HOMA results for institutional distance and entry mode/degree of ownership Predictor Kn Mean (p value) SE Q test I Pearson product-moment correlation ) and partial correlation coefﬁcients ) xy.z Institutional distance to entry mode 364 862,885 - 0.029 (0.000) 0.006 10,073.72 0.96 Unidimensional institutional distance to entry mode 109 336,779 0.003 (0.685) 0.008 1616.81 0.93 Regulatory distance to entry mode 72 247,806 - 0.049 (0.005) 0.017 4948.15 0.99 Normative distance to entry mode 55 163,697 - 0.034 (0.059) 0.018 2608.68 0.98 Cognitive distance to entry mode 28 67,548 - 0.041 (0.000) 0.011 175.04 0.83 Formal distance to entry mode 44 21,873 - 0.016 (0.348) 0.017 232.90 0.81 Informal distance to entry mode 56 25,182 - 0.069 (0.000) 0.013 205.06 0.72 Entry mode measurement Dummy 162 598,204 - 0.019 (0.019) 0.008 5474.57 0.97 Categorical 35 18,909 - 0.056 (0.019) 0.024 298.26 0.88 Continuous 167 245,772 - 0.034 (0.000) 0.009 3076.70 0.95 Published or not Published 351 847,947 - 0.029 (0.000) 0.006 10,018.75 0.96 Unpublished 13 14,938 - 0.046 (0.006) 0.017 43.27 0.68 Multiple countries only Institutional distance to entry mode 113 367,647 - 0.044 (0.000) 0.009 2357.68 0.95 Unidimensional institutional distance to entry mode 29 267,886 - 0.028 (0.031) 0.013 708.89 0.96 Regulatory distance to entry mode – – – – – – Normative distance to entry mode – – – – – – Cognitive distance to entry mode – – – – – – Formal distance to entry mode 35 18,700 - 0.006 (0.746) 0.019 177.54 0.80 Informal distance to entry mode 43 21,363 - 0.071 (0.000) 0.015 146.70 0.70 b = 0.003 and p = 0.685). We do not have a sufﬁ- p = 0.027). We interpret this as support for our cient number of studies to look into the effect of more general observation that, to understand sample structure on the various distances, but, as institutional distance effects, it is critical to distin- seen in Table 5, in studies with multiple home and guish distance effects from the direct (i.e., ‘‘proﬁle’’) host countries, the effect of formal distance is not institutional effects of the respective country. The signiﬁcant (b = 0.006 and p = 0.746). We present latter conclusion also applies to location choice this result with caution given the small number of studies. Here, we ﬁnd a general negative and such studies in our sample which do not allow signiﬁcant relationship between institutional dis- drawing deﬁnitive conclusions (the number of tance and location choice (b = - 0.028; p = 0.087), correlations is 35). In contrast, informal distance but this effect turns insigniﬁcant in studies using appears to be rather stable, showing a negative and multiple home and host countries (b = - 0.017; signiﬁcant effect on entry mode (b = - 0.069 and p = 0.343). p = 0.000) irrespective of sample structure (b = - 0.071 and p = 0.000 for the sample with THE STATE OF INSTITUTIONAL DISTANCE multiple home and host countries). RESEARCH Our review of the 171 papers combined with the Establishment Mode and Location Choice meta-analysis on 137 of them provides sufﬁcient We ﬁnd no signiﬁcant relationship between insti- grounds for evaluating the current state of institu- tutional distance and establishment mode (acqui- tional distance research. We can conclude that sition vs. greenﬁeld; b = 0.021; p = 0.146). The institutional distance has ﬁrmly established itself as number of establishment mode studies using mul- one of the core constructs in international business tiple dimensions (either formal–informal, or regu- research, and has enriched our understanding of a latory–normative–cognitive) is too small to draw number of important phenomena for ﬁrms doing robust conclusions (detailed results in the ‘‘Ap- business across borders. Moreover, a diverse set of pendix’’). Interestingly, the institutional distance methods and measures have been developed and effect becomes positive and signiﬁcant in studies used for capturing institutional distance, and there using multiple home and host countries (b = 0.035; Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al even seems to be an emerging convergence on effects of institutional distance. This results in a some best practices in methodology. rather generic discussion without deep institutional At the same time, our review uncovered certain explanations and a somewhat superﬁcial applica- problems, showing that this literature can some- tion of the construct as a ‘‘one-size-ﬁts-all’’ or times be ill-deﬁned theoretically and less than ‘‘catch-all’’ treatment of country differences. Ulti- rigorous empirically. This is reminiscent of past mately, it reﬂects a simplistic view on the impact of critiques of cultural distance research (Kirkman institutional distance affecting all phenomena of et al., 2006; Maseland, Dow & Steel, 2018; Shenkar, cross-border nature in a similar and negative way. 2001; Tung & Verbeke, 2010; Zaheer et al., 2012), Our observation is that this problem is particularly although it is our impression that these issues are common in studies conceiving of institutional even more pervasive for institutional distance. This distance as a unidimensional construct (see is perhaps so because cultural distance research has Table 1). been around longer and has matured as a ﬁeld of Second, the three institutional perspectives differ inquiry (Cuypers, Ertug, Heugens, Kogut, & Zhou, in their main theoretical theses, which are 2018). While the concept of culture is equally broad anchored, respectively, in distinct disciplines, soci- and multi-faceted as institutions, international ology, economics, and political science, and asso- business scholars have converged on using a nar- ciated with distinct levels of analysis, theoretical rower subset of culture theories and frameworks explanations, assumptions, and boundary condi- (e.g., Hofstede, 1980; House, Hanges, Javidan, tions. When papers mix perspectives indiscrimi- Dorfman, & Gupta, 2004; Schwartz, 1994, 1999; nately, they run the risk of logical inconsistency in Peterson & Barreto, 2018), allowing a more precise their predictions. As discussed above, organiza- and consistent theorizing on the effects of cultural tional institutionalism and institutional economics distance. There has not been such a maturation of may, but need not, make the same predictions on the institutional distance research. On the con- the impact of distance on ﬁrms. For example, trary, there seems to be a continuing proliferation examining the challenges of entry of emerging of conceptualizations and applications. This might market ﬁrms going to developed economies, orga- also be partially caused by the richness of the nizational institutionalism is likely to suggest a institutional perspective as well as the abundance negative impact of distance, while institutional of country-level secondary data of institutional economics might emphasize the positive learning nature. Below, we discuss several key problematic opportunities for the ﬁrm entering an institution- areas and suggest ways in which this area of ally developed and stable market. Equally problem- research can be streamlined and strengthened. atic is the common practice that we observed of equating culture with informal institutions and Theoretical Ambiguities also with the cognitive or normative pillars from We found that the papers in our study are not Scott’s framework. sufﬁciently explicit and precise with regard to the A related theoretical problem concerns the rigor particular strand of institutional theory they draw of the presented explanatory mechanisms of insti- upon, whether organizational institutionalism, tutional distance effects. Although most of the institutional economics, or comparative institu- papers reviewed provide some theoretical explana- tionalism. There are exceptions where authors tions, many reiterate similar arguments in linking clearly and consistently anchor their theoretical different institutional variables to different organi- models and methodologies in a particular perspec- zational outcomes. For example, formal and regu- tive (e.g., Dikova, Sahib, & Witteloostuijn, 2010; latory institutions have been suggested to inﬂuence Estrin et al., 2009; Kostova, 1996; Madsen, 2009). a number of different outcomes based on the same However, many papers lack such clarity, either not set of standard explanations, often referring to specifying the perspective they take or mixing ideas increasing costs of doing business abroad. This is from multiple perspectives, muddling the theoret- also often the case for informal institutions or ical argumentation (see Tables 1, 2). This can lead cognitive and normative pillars. Furthermore, some to at least two problems. papers that treat institutional distance as multidi- First, when a paper is not clearly anchored in a mensional do not always develop arguments for the particular institutional model, it is less likely to differential effects of the different pillars, proposing utilize its theoretical rigor and provide a precise and instead a generic distance effect and thus failing to sharp theoretical argumentation for the proposed Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al Table 6 Primary studies included in the meta-analysis 1. Abdi, M., & Aulakh, P. S. 2012. Do country-level institutional frameworks and interﬁrm governance arrangements substitute or complement in international business relationships? Journal of International Business Studies, 43(5): 477–497 2. Adamoglou, X., & Kyrkilis, D. 2018. FDI entry strategies as a function of distance—The case of an emerging market: Turkey. 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Journal of World Business, 50(4): 718–728 utilize the opportunities that the unique pillars or one host country. This analysis provides statis- provide for enriching the theory. tical evidence for concerns previously raised in the In our view, all of these critical shortcomings in literature about the potential dangers of conﬂating the existing literature on institutional distance can distance and direct (‘‘proﬁle’’) effects caused by be easily corrected by a more careful and disci- certain research design solutions (Brouthers et al., plined approach. The ﬁrst step in distance studies 2016; Harzing & Pudelko, 2016; van Hoorn & should be to specify the particular theoretical Maseland, 2016). The distinction between institu- perspective employed. The choice of which per- tional proﬁle (the set of regulatory, cognitive, and spective to use should be driven by what is most normative institutions in a given country) and theoretically appropriate given the phenomenon institutional distance (the difference of the institu- under study and the particular research question tional proﬁles of two countries) was recognized in asked. Is the story primarily one of social embed- the initial work in this area (Kostova, 1996). dedness in institutionalized ways of conducting However, it has been ignored in some subsequent certain functions that are consistent with rules and applications, by framing studies in terms of dis- regulation and are viewed as socially appropriate tance but presenting arguments based on the and legitimate? Or is it one of the quality of market institutional conditions of a host country (proﬁle). institutions and the related risks, uncertainty, and We often observed this conﬂation of distance and costs? Or is our research question best tackled proﬁle effects in work on entry or locational through the lens of a national system of institu- decisions or performance in emerging markets, tional order whereby different aspects of the envi- where authors describe distance effects by dis- ronment logically hang together? The answer to cussing the poor institutional conditions in the these questions will lead scholars to choose orga- target market (e.g., Romero-Martinez et al., 2019). nizational institutionalism (Scott, 1995), institu- There is an implicit assumption in these papers that tional economics (North, 1990, 1991), or the investor comes from an institutionally devel- comparative institutionalism (Hall & Soskice, oped home country, most often the US, which 2001; Whitley, 1999; Jackson & Deeg, 2008, 2019) means that the distance measures capture the as their main theoretical framework. Anchoring a deviation of the host countries’ institutional envi- study and explicitly conveying the chosen perspec- ronments from the mature market institutional tive provides a clear starting point and a solid environment at home. In this case, the sign of the foundation for building the arguments, developing difference between home and host tends to be the propositions and hypotheses, as well as design- always in one direction, from high to low quality of ing the proper methodology for conducting the institutions. Finally, it should be noted that dis- research. tance is not always the appropriate framing; some studies, because of their speciﬁc research questions, Distance versus Proﬁle should focus instead on the direct effects of insti- One of the most shocking ﬁndings in our review tutional proﬁle of a particular country (host or was the non-signiﬁcant relationship between three home). commonly used institutional distances (unidimen- Another fascinating result in our analysis showed sional, formal, and regulatory) and ﬁrm perfor- that this design issue (single home or host country) mance, which we found in the meta-analytical tests is not a problem for informal institutions, as in the smaller balanced sub-sample of studies using evidenced by the robust effects of informal and multiple home and host countries. This was in normative institutional distance. We believe this is contrast to the signiﬁcant relationship of these due to the distinct conceptual nature of formal variables in the imbalanced samples with one home versus informal institutions, in particular the Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al Table 7 HOMA results for institutional distance and location choice Predictor Kn Mean (p value) SE Q test I Pearson product–moment correlation (r) and partial correlation coefﬁcients (r ) xy.z Institutional distance to location choice 45 1,244,420 - 0.028 (0.087) 0.017 14,055.58 1.00 Unidimensional distance to location choice 14 300,720 - 0.007 (0.064) 0.003 52.70 0.72 Regulatory distance to location choice – – – – – – Normative distance to location choice – – – – – – Cognitive distance to location choice – – – – – – Formal distance to location choice 8 429,730 - 0.154 (0.002) 0.050 6669.95 1.00 Informal distance to location choice 8 429,730 0.033 (0.000) 0.007 99.35 0.91 Multiple countries only Institutional distance to location choice 39 1,170,286 - 0.017 (0.343) 0.018 13,951.58 1.00 Table 8 HOMA results for institutional distance and establishment mode Predictor Kn Mean (p value) SE Q test I Pearson product–moment correlation (r) and partial correlation coefﬁcients (r ) xy.z Institutional distance to establ. mode 8 47,669 0.021 (0.146) 0.014 405.20 0.85 Formal distance to establ. mode 17 3,283 0.039 (0.374) 0.055 154.60 0.88 Informal distance to establ. mode 17 3,283 0.092 (0.097) 0.055 154.60 0.88 Regulatory distance to establ. mode 4 2,364 0.085 (0.118) 0.054 20.25 0.75 Normative distance to establ. mode 4 2,364 0.059 (0.162) 0.042 12.15 0.59 Cognitive distance to establ. mode – – – – – – Unidimensional institutional distance to establ. mode 16 36,375 - 0.016 (0.316) 0.016 98.23 0.83 Multiple countries only Institutional distance to establ. mode 23 39,722 0.035 (0.027) 0.016 165.24 0.85 directionality of formal distance and the neutrality research has not yet arrived at standardized, sys- of informal distance. Especially in light of the tematic, and theoretically driven approaches with measures used for these variables (measuring infor- regard to the empirical use of this construct. This, mal institutions through Hofstede’s cultural value coupled with insufﬁcient justiﬁcation of the use of dimensions), it becomes clear that regulatory and particular measures in many papers, raises ques- formal institutional aspects range on a scale from tions about the rigor of this work and may lead unfavorable to favorable, poor to good, weak to some to believe that certain measures are being strong, while cultural values are just different across used out of convenience, even if they are not the countries. Paying attention to the distinction most appropriate theoretically and empirically. between institutional distance and proﬁle effects Furthermore, as discussed above, some studies use is critical for building stronger theoretical models the same data to measure different types and pillars and choosing proper empirical design accordingly. of institutions, sometimes from different institu- tional perspectives. This raises serious questions Measurement Ambiguities about the theoretical logic and the meaning of the Our review uncovered a number of areas of concern ﬁndings in particular studies: are they really due to with regard to operationalization and measurement institutional distance or some undeﬁned generic of institutional distance. There appears to be some variable that captures country? initial convergence on measures of formal and Another issue is the common use of country-level regulatory institutional distance, especially when it secondary data, which assess institutional environ- is operationalized as a general country-level con- ments in generic terms and at the country level, struct rather than in a domain-speciﬁc way (see and thus depart from the idea of issue speciﬁcity, Table 2). There is also an increasing number of particularly important in the organizational insti- authors who opt for measuring informal institu- tutionalism perspective. This is especially problem- tional distance with the Hofstede-based distance atic when the cognitive dimension of institutional index. However, our overall conclusion is that this environments is considered. Using country-level Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al measures of cultural values (e.g., Hofstede), which corruption, and strength of political institutions, we found to be a common approach, is a big all of which can be linked to North’s ideas of ease of departure from the original meaning of this dimen- doing business, market-supporting institutions, sion as the shared knowledge and the taken-for- transactions costs, and uncertainty. The EFI focuses granted ways of conducting certain business func- on the degree to which economic actors are free tions (Kostova, 1996). from government interference and government- While the literature on institutional distance is imposed constraints and regulations in different still in its growth and maturation stage, we believe areas of economic activity, such as the labor that there are ways in which these measurement market, capital market, trade policies, investment ambiguities can be addressed to improve validity regulations, and others. Using these sources inter- and rigor. For organizational institutionalism, the changeably may be inconsistent with the theories main remedies include: (1) carefully specify the employed. In our view, the EFI might have a slight level of analysis, as it can be ﬁeld, industry, ideological bend as it is anchored in neo-liberal country, or meta-environment; (2) try to choose philosophy and the assumption of free market or develop measures of the regulatory, cognitive, superiority. Thus, the WGI might be more in line and normative pillars that are issue-speciﬁc at that with the conceptual essence of North’s formal level, and (3) avoid using interchangeably the same institutions. measures for the different institutional dimensions Furthermore, the recent tendency to use Hofst- (e.g., normative measured through regulatory indi- ede-based cultural distance as a measure of infor- cators, or cognitive measured through Hofstede’s mal distance in the same perspective is cultural values). Ultimately, the goal should be to problematic. As we have discussed, culture does employ measures that capture in the best possible not adequately capture the idea of informality as a way the three-pillar aspects of the institutional substitute for weak formal institutions, as con- environment that are the closest to the phenomena ceived by North (1990, 1991). Cultural values are under study and thus are true to the theoretical different across countries, but they cannot be roots of this perspective. This can be done in at automatically assumed to have the capacity to least two ways. First, given the wide availability of substitute for deﬁcient formal institutions. For various databases nowadays capturing institutional example, it is hard to argue that Kogut and Singh’s context, researchers could identify measures that (1988) cultural distance index is a substitute for are close to the issue under study. For example, to poor rule of law or low investment freedom in a evaluate the institutional environment with regard country. Thus, researchers need to be more careful to CSR, one could look for secondary data that and precise in measuring informal institutions and describes regulations, social knowledge, and norms informal distance in this tradition. It might be related to CSR, as opposed to using some generic useful to start rethinking the way we have opera- country-level indicators. Alternatively, if such mea- tionalized informal institutions in this tradition. sures are unavailable or unsatisfactory, it would be Could we explore concepts that better capture the theoretically appropriate and worth the effort for informal mechanisms facilitating economic trans- scholars to develop a customized survey instrument actions and coordinated activities in a particular that measures the institutional environment for the country like guanxi in China (e.g., Xin & Pearce, particular domain of interest. Both of these 1996), networked capitalism in the form of keiretsu approaches are true to the theoretical logic of in Japan (e.g., Dyer, 1996), business groups in Latin organizational institutionalism. America and East Asia (e.g., Guillen, 2002; Khanna For the institutional economics perspective, & Palepu, 2000; Kim, Kim & Hoskisson, 2010), scholars should use measures and operationaliza- public social capital (Adler & Kwon, 2002; Putnam, tion of formal and informal institutions with 1993), and others? While these ideas require much caution. For example, we observed some recent further work, they seem to be closer to the notion convergence in using WGI and EFI for measuring of informal institutions in North’s sense than the formal institutional distance. However, it should be cultural value frameworks of Hofstede (1980)or understood that, while both of these databases Schwartz (1994, 1999). measure formal institutions in a given country, they focus on different aspects reﬂecting different institutional domains. WGI measure quality of governance, such as rule of law, degree of Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al research, providing numerous opportunities to study the cross-border impact on various strategic CONCLUSION International business scholars have signiﬁcantly and organizational outcomes. At the same time, it expanded institutional theory by exploring the has led to a number of ambiguities and problems in this area because international business scholars distinct cross-border condition that deﬁnes their have often failed to recognize and/or articulate the domain of inquiry (Westney, 1993; Zaheer et al. distinct theoretical and empirical implications of 2012). The introduction of the construct of insti- tutional distance, which develops the notion of the three perspectives. Thus, our overarching rec- institutional embeddedness to the international ommendation for strengthening distance research is to follow a more thoughtful and disciplined setting, and the voluminous work examining dis- approach, starting with a clear determination of tance effects on various business outcomes, exem- which institutional perspective is followed in a plify such contributions. Our review has documented the growth and proliferation of this particular paper and why. This would lead to better literature and has analyzed its current state based explanation of the mechanisms linking institu- tional distance to the outcomes of interest and on the three institutional perspectives: organiza- would drive the selection of appropriate measures tional institutionalism, institutional economics, ‘‘in sync’’ with the chosen perspective. 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APPENDIX This Appendix describes the details of the meta- Google Scholar, we searched across 19 top IB/IM analytic approach we followed including sampling journals for the key phrase: ‘institutional distance’ procedure, analytical method, and results details. and identiﬁed 549 papers. The journal included were: Academy of Management Journal, Academy of Management Review, Administrative Science Quarterly, Sample Strategic Management Journal, Journal of International We coded 137 empirical papers, listed at the end of Business Studies, Organization Science, Journal of Inter- this Appendix. This set of 137 is a subset of national Management, Journal of Management, Journal empirical studies of the 171 studies we included of Management Studies, Global Strategy Journal, Journal in our overall review of the literature. We collected of World Business, International Business Review, Asia the data in four rounds. In the ﬁrst round using Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al Paciﬁc Journal of Management, International Journal of institutional distance. Finally, we have included Management Reviews, Management International some study characteristics: speciﬁcally, whether or Review, Research Policy, Thunderbird International Busi- not the study has included multiple countries for ness Review, and European Journal of International both the home and host countries or if it is a single Management. We checked the papers published in country study, and whether or not it has been these journals manually to ensure that this was an published. Institutional distance was coded as empirical study. speciﬁed by the primary study. So, if the primary In the second round, we used additional search study refers to regulatory distance, it is coded as terms, including ‘‘institutional difference’’, ‘‘admin- such. If the primary study does not specify types of istrative distance’’, ‘‘regulatory distance’’, and ‘‘for- institutional distance, it is coded as unidimensional mal distance’’. Third, we applied snowballing on 14 institutional distance. This resulted in six varia- papers that introduced new measurements of insti- tions: unidimensional institutional distance, regu- tutional distance: Baik, Kang, Kim, & Lee (2013), latory distance, normative distance, cognitive Berry et al. (2010), Dikova (2009), Dikova et al. distance, formal distance, and informal distance. (2010), Estrin et al. (2009), Gaur & Lu (2007), Gaur As explained in the main text, doing so allows us to et al. (2007), Gubbi et al. (2010), He et al. (2013), distinguish between studies focusing on multidi- Lavie & Miller (2008), Li & Yao (2010), Petrou & mensional operationalization in the ‘‘Northean’’ or Thanos (2014), Salomon & Wu (2012), and Xu et al. the ‘‘Scottean’’ tradition. As explained in the main (2004). This process generated an additional set of text, we have also attempted to code empirical 496 articles. Finally, we have repeated the ﬁrst three papers in the comparative institutionalist tradition, rounds in January 2019 to include all papers mainly through the framework of Berry et al. published in 2017 and 2018, which yielded another (2010). However, the number of papers that dis- set of 465 articles. Of all these papers, we selected cussed one of the four dependent variables of those that used the institutional distance construct interest while simultaneously using the Berry in empirical models testing various outcomes et al. (2010) approach was too small to be used in related to international business. An additional our meta-analysis. criterion for inclusion in the meta-analysis was that With regard to the way in which institutional a certain correlation between institutional distance distance was constructed and measured, we identi- and a particular outcome (e.g., location choice) had ﬁed four different methods: Euclidean distance, the to appear in at least two studies by different authors Kogut and Singh Index, Mahanalobis, differences, and at least three correlations. The resulting dataset and other/unknown. We also coded which dataset for the meta-analysis included 954 correlations is used to operationalize institutional distance. The across 137 papers. Classifying these studies accord- main categories are: the WGI, the EFI, the ICR ing to the dependent (outcome) variable, we have: guide, the GCR (both the regulatory distance item 467 ID-performance correlations (84 papers), 364 set and the normative distance item set; Xu et al., ID-Entry Mode correlations (66 papers), 58 ID- 2004), the WCY (both the regulatory distance item Establishment Mode correlations (12 papers), and set and the normative distance item set; Gaur & Lu, 45 ID-location choice correlations (7 papers). As 2007; Gaur et al., 2007), Hofstede, and others. We some papers address multiple outcomes, the total would note that many studies that operationalized number of papers is less than the number of topics institutional distance also measured cultural dis- addressed. Table 6 lists all the studies included in tance (primarily using the Hofstede-based Kogut the meta-analysis. and Singh index) separately. As a result, there are studies that have operationalized formal and infor- mal institutional distance via the WGI and the Coding Hofstede-based Kogut and Singh cultural distance Our coding has focused on the type of institutional index, but there are also studies that have used the distance, how it has been operationalized, and the exact same datasets to operationalize unidimen- four different dependent variables (performance sional institutional distance and cultural distance. and entry mode for which we show results in the We have included both groups of studies in our main text, and location choice and establishment meta-analysis, but despite the empirical similarity mode for which we only show detailed results in we have coded them differently. The ﬁrst group is this ‘‘Appendix’’—see Tables 7, 8). We also coded coded as formal and informal distance (thus the way that studies have operationalized including cultural distance). The second group is Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al coded unidimensional institutional distance, and Similarly, a three-asterisk signiﬁcance indicates an cultural distance is not coded. The obvious reason is upper bound of 0.01 and a lower bound of 0; our focus on institutional distance. As the second therefore, we use a p value of 0.005. Consequently, group does not consider cultural distance to be part the p value is converted to either a t value or a of institutional distance, we consistently follow the z value (depending on which one is appropriate), argumentation of the authors of these primary and through the use of the t (or z) value, the PCC is studies, and code it accordingly. Based on the same calculated. Finally, when multiple measurements of argumentation, we have also not included studies the focal effect are reported in one study (e.g., due that only looked at cultural distance, and did not to the reporting of results for different operational- discuss institutional distance. Hence, if there is no izations of institutional distance, the use of multi- measurement whatsoever of institutional distance, ple samples, or through different the study is excluded. operationalizations of the dependent variable), we With regards to the dependent variables of this included all of them in our analyses. Monte Carlo study, we consider: performance, entry mode/de- simulations show that procedures using the com- gree of ownership, location choice, and establish- plete set of measurements outperform those repre- ment mode. Performance includes accounting, senting each study with a single value in areas like market, survey, and survival measures. Further- parameter signiﬁcance testing and parameter esti- more, we have distinguished between performance mation accuracy (Bijmolt & Pieters, 2001). of the MNC and performance of the subsidiary. We employ the Hedges–Olkin-type Meta-Analysis Entry mode was operationalized in three distinct (HOMA) to determine the mean size of the effect of ways. First, (JV vs. WOS) takes value 1 if WOS and 0 institutional distance on performance, location if JV. Second, categorical values are used, where choice, entry mode and establishment mode. We higher values indicated more ownership. Third, perform our computations using random-effects entry mode has been operationalized as a contin- HOMA, which accounts for potential heterogeneity uous value of the degree of ownership. Location in the effect size distribution and is more conser- choice was measured as a dummy variable assum- vative than ﬁxed-effects HOMA (Kisamore & Bran- ing the value of 1 if the country was chosen and 0 nick, 2008; Raudenbush & Bryk, 2002). To otherwise. Establishment mode (Greenﬁeld vs. accurately account for differences across effect Acquisition) takes value 1 if Acquisition or 0 if sizes, we weight each effect size by its inverse Greenﬁeld. variance weight, w, the inverse of the squared standard error (Hedges & Olkin, 1985). Method ABOUT THE AUTHORS For each paper, we collected both the bivariate Tatiana Kostova is Carolina Distinguished Profes- correlation (r) and the partial correlation coefﬁcient sor, the Buck Mickel Chair and Professor of Inter- (r ). To calculate the partial correlation coefﬁ- xy.z national Business at the Darla Moore School of cient we use the following procedure. First, we Business, University of South Carolina. Her calculate either a t value or a z value (depending on research focuses on MNE management and the used analysis of the paper) through: Beta/ includes topics like institutional embeddedness, Standard error = t(/z) value. Second, we use the institutional distance, institutional theory of the following formula for calculating the PCC: PCC = 2 2 MNE, cross-border transfer and adoption of prac- SQRT ((t )/((t ) + Degrees of Freedom)) 9 sign, or: 2 2 tices in MNEs, legitimacy, agency theory in HQ – PCC = SQRT ((z )/((z )+ N)) 9 sign (Greene, 2003). subsidiary dyads in MNEs. She is an AIB Fellow and Several papers in the sample did not include the has served as Vice President of AIB, Chair of the IM standard error or t value but reported the signiﬁ- Division of Academy of Management, and on many cance using asterisks. In order to derive a partial editorial boards. correlation coefﬁcient from these observations, we use the t (or z) value associated with the mean of Sjoerd Beugelsdijk is a Professor of International the indicated p value category. For instance, when a Business and Management at the University of study indicates that the observation has a two- Groningen, the Netherlands. He earned his PhD at asterisk signiﬁcance, it means that the upper bound Tilburg University and explores how cultural and of the p value is 0.05 and the lower bound of the institutional diversity affect international business. p value is 0.01; therefore, we use a p value of 0.03. Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al He is currently serving as Reviewing Editor for JIBS. Committee Chair of the International Management In 2019 he received the JIBS silver medal for his Division of Academy of Management, and Com- contribution to the ﬁeld. munications Ofﬁcer of AIB Insights. W. Richard Scott received his PhD from the Marc van Essen (PhD Erasmus University) is an University of Chicago and is currently Professor Associate Professor of International Business at the Emeritus in the Department of Sociology with Darla Moore School of Business, University of courtesy appointments in the Graduate School of South Carolina. His research interests include Business, Graduate School of Education, School of comparative corporate governance, international Engineering, and School of Medicine, Stanford business, family business, and meta-analytic University. Scott is an organizational sociologist research methods. His works applying meta-analy- who has concentrated his work on the study of sis have been published or are forthcoming in the professional organizations, including educational, following journals: Academy of Management Jour- engineering, medical, research, social welfare, and nal, Journal of Banking and Finance, Journal of nonproﬁt advocacy organizations. During the past International Business Studies, Journal of Manage- three decades, he has centered his research and ment, Journal of Management Studies, and Orga- writing on the relation between organizations and nization Science, and other outlets. their institutional environments. In 2015, he was Open Access This article is licensed under a named ‘‘Eminent Scholar of the Year’’ by the Creative Commons Attribution 4.0 International Academy of International Business. License, which permits use, sharing, adaptation, distribution and reproduction in any medium or Vincent E. Kunst is a Lecturer of International format, as long as you give appropriate credit to the Business at the University of Liverpool. He earned original author(s) and the source, provide a link to his PhD at the University of Groningen and his the Creative Commons licence, and indicate if research focuses on how institutions and institu- changes were made. The images or other third party tional complexity inﬂuences international business material in this article are included in the article’s activities. Creative Commons licence, unless indicated other- wise in a credit line to the material. If material is Chei Hwee Chua is a Doctoral Candidate (ABD) in International Business at the Darla Moore School of not included in the article’s Creative Commons Business, University of South Carolina. Her licence and your intended use is not permitted by research topics include intercultural negotiation statutory regulation or exceeds the permitted use, and communication, institutional theory and sus- you will need to obtain permission directly from tainable adoption of organizational practices at the copyright holder. To view a copy of this licence, MNC subsidiaries, expatriate management, and visit http://creativecommons.org/licenses/by/4.0/. post-merger and acquisition integration manage- ment. She is currently serving as Communications Publisher’s Note Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Accepted by Eleanor Westney, Consulting Editor, 9 November 2019. This article has been with the authors for two revisions. 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Publisher: Springer Journals
Copyright: Copyright © The Author(s) 2019
ISSN: 0047-2506
eISSN: 1478-6990
DOI: 10.1057/s41267-019-00294-w
Publisher site: See Article on Publisher Site

Abstract

Tatiana Kostova , This paper presents a review and critique of the 20-year-old literature on Sjoerd Beugelsdijk , institutional distance, which has greatly proliferated. We start with a discussion W. Richard Scott , of the three institutional perspectives that have served as a theoretical foundation for this construct: organizational institutionalism, institutional Vincent E. Kunst , economics, and comparative institutionalism. We use this as an organizing Chei Hwee Chua and framework to describe the different ways in which institutional distance has Marc van Essen been conceptualized and measured, and to analyze the most common organizational outcomes that have been linked to institutional distance, as Moore School of Business, University of South well as the proposed explanatory mechanisms of those effects. We substantiate Carolina, 1014 Greene St, Columbia, SC 29208, our qualitative review with a meta-analysis, which synthesizes the main ﬁndings USA; Faculty of Economics and Business, in this area of research. Building on our review and previous critical work, we University of Groningen, Nettelbosje 2, note key ambiguities in the institutional distance literature related to underlying 9700 AV Groningen, The Netherlands; 3 theoretical perspectives and associated mechanisms, distance versus proﬁle Department of Sociology, Stanford University, effects, and measurement. We conclude with actionable recommendations for 450 Serra Mall, Stanford, CA 94305, USA; improving institutional distance research. University of Liverpool Management School, University of Liverpool, Chatham St, Journal of International Business Studies (2020) 51, 467–497. Liverpool L69 7ZH, UK https://doi.org/10.1057/s41267-019-00294-w Correspondence: Keywords: institutional theory; institutional distance; institutional context T Kostova, Moore School of Business, University of South Carolina, 1014 Greene St, Columbia, SC 29208, USA The online version of this article is available Open Access e-mail: [email protected] INTRODUCTION International business scholars have long recognized the impor- tance of national context and contextual embeddedness of orga- nizations (Westney, 1993), and have studied the impact of ‘‘distance’’, i.e., cross-country contextual differences, on ﬁrms’ strategies, management practices, and organizational outcomes (e.g., Johanson & Vahlne, 1977; Kogut & Singh, 1988; Kostova & Zaheer, 1999). Given that conducting business across borders is a Received: 22 February 2018 deﬁning characteristic of multinational companies (MNCs), some Revised: 19 September 2019 have concluded that ‘‘essentially, international management is Accepted: 9 November 2019 Online publication date: 20 December 2019 The construct of institutional distance Tatiana Kostova et al management of distance’’ (Zaheer et al., 2012: 19). elements (Kostova, 1996; Scott, 1991). Institutional Reﬂecting the different domains of national con- distance also allows the capturing of the dynamic text, scholars have examined different types of aspects of context, reﬂecting important institu- distance including cultural (e.g., Beugelsdijk, Kos- tional changes in countries throughout the world. tova, Kunst, Spadafora, & van Essen, 2018b; Kirk- Theoretically, it can be more precise in its predic- man, Lowe, & Gibson, 2006, 2017; Kogut & Singh, tions than cultural distance if analyzed with regard 1988; Shenkar, Luo, & Yeheskel, 2008), psychic to a speciﬁc issue, for example, quality manage- (e.g., Dow & Karunaratna, 2006; Johanson & ment (Kostova, 1996) or entrepreneurship (Busen- Vahlne, 1977), geographic (e.g., Beugelsdijk & itz, Gomez, & Spencer, 2000). Over time, this work Mudambi, 2013; Hakanson & Ambos, 2010), eco- has been enriched by many contributions that have nomic (e.g., Ghemawat, 2001), and others. further developed the construct, expanding and Since its introduction in the literature in the mid- modifying its conceptualization, introducing new 1990s (Kostova, 1996, 1997), the construct of ways of operationalization and measurement, and institutional distance has gained prominence in incorporating it in hundreds of studies of different international business research (e.g., Aguilera & international business phenomena (e.g., Bae & Grøgaard, 2019; Bae & Salomon, 2010; Berry, Solomon, 2010; Berry et al., 2010; Gaur & Lu, Guille ´ n, & Zhou, 2010; Beugelsdijk, Ambos, & Nell, 2007; Gaur, Delios, & Singh, 2007; Xu, Pan & 2018a; Fortwengel, 2017; Jackson & Deeg, 2019; Beamish, 2004). Zaheer, Schomaker, & Nachum, 2012). Broadly The proliferation of deﬁnitions, operationaliza- deﬁned as the difference between the institutional tions, and proposed theoretical effects, however, proﬁles of two countries, typically the home and has also raised concerns about the tightness and the host country of an MNC (Kostova, 1996), rigor of this construct and the comparability of institutional distance has quickly become one of institutional distance research across studies. A the most widely used types of distance in this number of scholars have been troubled by such research. The interest in institutional distance has somewhat undisciplined diversity and the potential been triggered by the rapid expansion of MNCs to problems it might create, and have offered ideas of markets that are substantially different from their how to strengthen this research, conceptually and home countries. With increased globalization, methodologically (Bae & Salomon, 2010; Berry developed country MNCs are ﬁnding themselves et al., 2010; Beugelsdijk et al., 2018a; Fortwengel, in unfamiliar territories, as they enter emerging 2017; Hotho & Pedersen, 2012; Philips, Tracey, & markets and developing and transition economies. Karra, 2009; Zaheer et al., 2012). We too recognize These markets are characterized by uncertainty and that, at the extreme, such a broad and unscripted ambiguity, high economic and political risks, approach may create the sense that institutional unusual complexity, and major deﬁciencies, collec- distance is a ‘‘catch all’’ construct simply substitut- tively termed ‘‘institutional voids.’’ (Khanna, ing for country. At this point in time and in this Palepu, & Sinha, 2005). Likewise, a growing num- context, it would be beneﬁcial to have a critical ber of emerging market MNCs are aggressively look at institutional distance research and to try to expanding to the most competitive markets in the streamline its many different strands and world, which often operate under very different approaches into a more cohesive view. economic systems and institutional rules (Fortune, Our objectives in this review paper are three-fold. 2018). Even if they do not directly invest abroad, The ﬁrst it to take stock of the growing literature on many companies are participants in global produc- institutional distance by identifying the major tion networks, which indirectly expose them to institutional theory traditions employed, the ways multiple foreign environments (Levy, 2008). Thus, in which institutional distance has been conceptu- understanding cross-country differences and their alized and measured, and the theoretical mecha- impact on business, and learning how to navigate nisms proposed. The second is to synthesize and successfully across diverse environments have analyze this literature by identifying robust ﬁnd- become front-and-center tasks for global managers. ings on the impact of institutional distance on As argued in the original research introducing the various organizational outcomes, including loca- institutional lens as an alternative to culture (Kos- tion choice, entry mode, performance, and others, tova, 1996, 1997), institutional distance provides a as well as gaps and problematic areas in this work. broader view of national contexts, encompassing The third is to offer insights and speciﬁc actionable not only cultural but also regulatory and cognitive recommendations for a more disciplined and Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al rigorous approach to institutional distance research institutional distance research is that companies in the future. We combine several approaches: a doing business across national borders are embed- comprehensive review of the literature, rigorous ded and exposed to multiple and different institu- meta-analysis of existing empirical research, and tional environments in their home and host analysis and insights. The paper is based on a countries, and, as a result, face unique difﬁculties preliminary identiﬁcation of over 1000 studies that and risks (Kostova, 1999). The extent of such have used the construct of institutional distance differences (i.e., institutional distance) determines (published between 2002 and 2018), followed by an the speciﬁc challenges faced in each set of condi- in-depth review of a representative sample of 171 tions and affects companies’ strategic and manage- studies, and a meta-analysis of 137 empirical papers rial decisions and actions. from this sample. Three Schools of Thought Institutional theory is rich and multifaceted (Aguil- THEORETICAL PERSPECTIVES era & Grøgaard, 2019). As a result, institutions, IN INSTITUTIONAL DISTANCE RESEARCH institutional embeddedness, and institutional dis- The construct of institutional distance is rooted in tance have been deﬁned in a variety of ways, the notion of contextual embeddedness of organi- depending on the particular institutional perspec- zations, which recognizes the ‘‘embeddedness of tive taken. Following Hotho and Pedersen’s insight- economic activity in wider social structures’’ ful framework (2012), we distinguish between three (Dacin, Ventresca, & Beal, 1999: 318). Originating strands of institutional theory: organizational insti- in political economy and economic sociology, the tutionalism, institutional economics, and compar- concept of embeddedness was social scientists’ ative institutionalism, which propose different response to both the ‘‘under-socialized’’ economic conceptualizations of institutions, institutional dis- views of organizations that focused exclusively on tance, and the mechanisms by which it affects resources and transactions, while ignoring the various outcomes. Institutional distance work has social aspect of markets, and the ‘‘over-socialized’’ drawn from all these perspectives, sometimes views that studied social processes without sufﬁ- explicitly specifying the perspective followed, and cient consideration of economic relations (Parsons, sometimes without a clear reference. This, we 1960; Polanyi, 1944). As Granovetter (1985) sug- believe, has led to some confusion and ambiguity, gests, economic activity occurs in on-going pat- which we will discuss in the critique section of the terns of social relations: ‘‘All market processes are paper. amenable to sociological analysis and …such anal- Organizational institutionalism is rooted in sociol- ysis reveals central, not peripheral features of these ogy. Here, institutions are viewed as relatively processes’’ (Granovetter, 1985: 505). Social struc- stable social structures composed of regulative, tures impact economic activity through a variety of cultural-cognitive, and normative elements that, mechanisms: structural (social ties between social together with associated activities and resources, actors); cognitive (symbolic representations and provide stability and meaning to social life (Meyer frameworks of meaning that affect interpretation & Rowan, 1977; Powell & DiMaggio, 1991; Selznick, and sense-making by economic actors); cultural 1957; Scott, 1995). Institutions determine not only (shared understandings, norms, belief systems, and what is legal but also ‘‘legitimate’’, i.e., accept- logics); and political (societal power structures and able and approved way of conducting certain the distribution of resources and opportunities) functions in a particular society; under pressures (Dacin et al., 1999; Zucker, 1987). for legitimacy in the broader institutional environ- Institutional theory in particular studies the ment, organizations belonging to the same organi- embeddedness of organizations in institutional zational ﬁeld become similar, or isomorphic, with environments (Hall & Soskice, 2001; Whitley, each other as they adopt those legitimate structures 1999; Jackson & Deeg, 2008, 2019; North, 1990; and practices, which over time assume a ‘‘taken for Scott, 1995, 2014). While institutions and institu- granted’’ status (Meyer & Rowan, 1977; Powell & tional embeddedness operate at different levels of DiMaggio, 1991; Selznick, 1957; Scott, 1995). analysis—from global, to ﬁeld, to organization, to The original deﬁnition of institutional distance industry, to interpersonal (Scott, 1995, 2014)—the (Kostova, 1996) drew from this perspective, specif- primary level employed in international business ically based on Scott’s (1995) ‘‘three pillars’’ con- research is the nation state. The central idea in ceptualization of institutions: regulatory (rules and Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al laws that exist to ensure stability and order in informal cultures affect market-seeking and efﬁ- societies), cognitive (established cognitive struc- ciency-seeking foreign direct investment in differ- tures in society that are taken for granted), and ent ways. Notably, informal distance tends to be normative (domain of social values, cultures, and more loosely deﬁned in this research tradition: for norms). Accordingly, institutional distance example, Zhu, Xia, and Makino (2015) introduce between two countries was deﬁned as the difference language differences as part of informal distance. between their regulatory, cognitive, and normative Although both organizational institutionalism institutions (Kostova, 1996). The main explanation and institutional economics suggest that institu- of why institutional distance matters here is that tional distance leads to higher costs of doing different countries have different institutions and, business abroad (e.g., Dikova, Sahib, & van Wit- therefore, different ways of conducting certain teloostuijn, 2010; Henisz & Williamson, 1999), functions that are viewed as ‘‘legitimate’’. When there is a fundamental difference between the companies do business across borders, they face a proposed explanatory mechanisms. Organizational challenge to not only learn new ways of conducting institutionalism emphasizes the legitimacy mecha- certain functions but also to satisfy multiple, nism whereby, in familiar institutional settings different, and possibly conﬂicting, legitimacy (e.g., their home country), organizations under- requirements and expectations. This creates ten- stand the existing institutional order and can more sions externally, between the organization and its easily comply with the legitimacy requirements external legitimating environment (e.g., a particu- and expectations, while, in unfamiliar, particularly lar host country), and internally, between organi- ‘‘distant’’, environments (e.g., host country), com- zational units located in different countries and panies have limited knowledge and understanding therefore abiding by different institutional rules of how things are and should be done to establish (Kostova & Zaheer, 1999). and maintain an effective and legitimate operation Institutional economics has its roots in the eco- (Kostova & Zaheer, 1999; Eden & Miller, 2004;Xu nomics discipline. Institutions are deﬁned as ‘‘the & Shenkar, 2002). There is also the risk of internal humanly devised constraints that structure human tensions between organizational units residing in interaction’’ and are categorized into formal (rules, different countries, as they try to work with the laws, constitutions) and informal (norms of behav- external institutional arrangements in their respec- ior, conventions, and self-imposed codes of con- tive country (Kostova & Roth, 2002). Furthermore, duct) (North, 1990: 3). Formal institutions there is an additional difﬁculty resulting from the determine the rules that govern economic activity different treatment that foreign companies get and thus reduce uncertainty, risk, and transaction from local actors due to their ‘‘foreignness’’ (e.g., costs. Informal institutions, too, help coordinate Mezias, 2002). In summary, institutional distance economic action and become particularly impor- here leads to higher costs and risks because of lack tant in the absence of strong formal market insti- of understanding of the institutional order, inabil- tutions. Accordingly, scholars have considered two ity to simultaneously adjust to institutional types of institutional distance: formal and infor- requirements in multiple countries, challenges in mal. As an example, Abdi and Aulakh (2012) establishing external legitimacy, and increased distinguish between formal institutional distance internal and external complexity. (i.e., differences between the formal institutions The emphasis in institutional economics is not such as existence and enforcement of market on legitimacy, liability of foreignness, and adapta- supporting rules) and informal institutional dis- tion, but on the differing quality of institutional tance (i.e., differences between the shared norms, environments between countries, and on the dif- values, practices, and frames of interpretation in ferent degree to which the existing institutions in a two countries). Estrin, Baghdasaeyan, and Meyer given country support effective economic activity (2009) view formal institutional distance as con- and coordination between economic actors. There cerning laws and rules that inﬂuence business is a ‘‘sign’’ to the distance in this perspective. The strategies and operations, and informal institu- increase in transaction costs depends not only on tional distance concerning rules embedded in val- the countries involved but also on the direction of ues, norms and beliefs. Slangen and Beugelsdijk foreign expansion (Trapczynski & Banalieva, 2016). (2010) use the distinction between formal and Less developed formal institutions in a given informal institutional distance to show how differ- country tend to increase transaction costs due to ences in formal governance regulations and the ineffectiveness of market mechanisms of Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al economic coordination. They also imply more emphasis in comparative institutionalism is on the opaque and unstable institutional rules that are differences between conﬁgurations of types of cases difﬁcult to make sense of and follow (Khanna & at the country level (Jackson & Deeg, 2008, 2019)or Palepu, 1997, 2000). The institution-related chal- between institutional clusters as illustrated by the lenges are greater for companies moving from a term varieties of capitalism (Judge, Fainschmidt, & more to a less institutionally developed environ- Lee Brown III, 2014; Hotho, 2013). The impact of ment than the other way around. While at home institutional differences from this perspective is such companies are generally used to relying on discussed in terms of the overall ‘‘ﬁt’’ between formal institutions to carry out their economic ‘‘ﬁrm-speciﬁc resources’’ and ‘‘the particular activities, expanding into less developed host resource environments of a host country’’ (Jackson countries requires new understanding of the role & Deeg, 2008: 543). Recognizing the interdepen- of informal institutions, and learning new strate- dence between the various institutional aspects is gies and tactics for functioning under such condi- an appealing advantage of this approach as it allows tions. Institutional distance is also an issue in the the capturing of cross-country ‘‘differences not of opposite direction, when companies are moving degree but of kind’’ (Jackson & Deeg, 2019: 5). At from less to more institutionally developed envi- the same time, it is a departure from traditional ronments. In this case, the challenges are more treatment of institutional distance and presents related to the organization’s ability to learn how to some theoretical and empirical challenges to dis- function under stricter and more mature institu- tance scholars. tional frameworks without the ‘‘help’’ of informal- Although not explicitly stated in their paper, we ity. In summary, distance in institutional view Berry et al.’s (2010) work as an attempt to economics has a differential effect, depending on bridge traditional comparative institutionalism the home and host countries’ institutional quality, with distance research. To do that, similar to the the speciﬁc sources of the related costs and risks, comparativist tradition, the authors conceptualize the types of organizational outcomes that might be institutions as a system of arrangements in nine affected the most, and the possible remedies for different facets of a country’s socio-economic life overcoming the challenges of distance. that logically hang together: politics, ﬁnance, Comparative institutionalism emphasizes the sys- economy, demography, administration, culture, tem of interdependent institutional arrangements knowledge, global connectedness, and geography. in different areas of socio-economic life in a given Unlike comparative institutionalism, though, they country (e.g., economic models, legal frameworks, do not collapse the construct to an institutional educational systems, national innovation systems, ‘‘variety’’ or ‘‘type’’. Instead, they suggest theorizing levels of development, role of the state, labor). This at the dimension level to capture possible differen- theory proposes typologies of national institutional tial effects. At the same time, to stay truer to the systems, such as the liberal market economy or the conﬁgurational approach, they depart from tradi- coordinated market economy (Hall & Soskice, tional methods of multidimensional operational- 2001; LaPorta, Lopez-de-Silanes, Shleifer, & Vishny, izations (e.g., Euclidean distance), proposing 1998; Nelson & Rosenberg, 1993; Whitley, 1999). instead the Mahalanobis method, which accounts Institutions reﬂecting the different facets of a for the interdependence between the different country’s institutional environment are seen as institutional dimensions (Berry et al., 2010). Over- complementary and in combination with each all, Berry et al.’s (2010) work has been well received, other. They exist in national conﬁgurations that especially for the proposed Mahalanobis method- generate a particular systematic logic of economic ology (e.g., Kang, Lee, & Ghauri, 2017; Lindner, action and reﬂect the overall institutional ‘‘charac- Muellner, & Puck, 2016). However, the key com- ter’’ of the nation (Jackson & Deeg, 2008, 2019). parative institutional theoretical ideas behind Berry In the context of cross-country diversity, this et al.’s (2010) work have not been sufﬁciently perspective is distinct from the previous two, in developed and employed in subsequent IB research. that conceptually it captures difference more than Use of the Three Perspectives distance. Both organizational institutionalism and For a more accurate assessment of the salience of institutional economics conceive of home- and the different institutional schools of thought in host-country diversity in terms of linear differences distance research, we relied on the subsample of between discrete institutional parameters or vari- 137 empirical studies included in our meta- ables (Jackson & Deeg, 2008, 2019). In contrast, the Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al analysis. We evaluated the perspective used by each Overall, organizational institutionalism has been paper in our sample: that is, each of the 137 the predominant perspective in this literature (38 empirical studies was classiﬁed in one or two of the of the 101 papers in our sample), followed by above traditions based on the primary theoretical institutional economics (28 of the 101 papers), and mechanisms discussed and hypothesized (see the an eclectic combination of different perspectives, ‘‘Appendix’’ for more details). Although the usually organizational institutionalism and institu- grounding of the research in a particular theoretical tional economics (22 of the 101 studies). Compar- tradition was not always clear and/or explicit, and ative institutionalism, while increasingly used in in many cases authors mixed multiple strands of international business research, has hardly been institutional theory, we were able to reach a applied as a theoretical lens in distance literature. consensus on this question through a rigorous Hence, it is not included as a stand-alone perspec- coding procedure. The coding was carried out by tive in Table 1. three independent scholars, followed by additional In our view, organizational institutionalism has deliberations in case of disagreement. Table 1 pro- received the most attention, partly because it was vides an overview of institutional distance studies the ﬁrst to be used in institutional distance research that have their theoretical grounding in the three (Kostova, 1996; Kostova & Roth, 2002; Busenitz institutional perspectives. et al., 2000). In addition, it provides a broad As seen from the table, the three perspectives framework for studying institutional context and have not been equally represented in this literature. cross-country differences, giving researchers many It should be noted that, of the 137 studies in the choices to pick country-level variables that reﬂect sample, institutional distance was part of the main various aspects of national environments and suit model in 101 papers. The other 36 studies used their research questions, ranging from laws and institutional distance as a control variable; thus regulations, to cognitive structures and social authors were less deliberate in clearly positioning knowledge, to social norms and cultural values. their discussion of distance in any particular theo- This approach allows the examination of institu- retical frame. Also, 13 of the 101 studies that tional effects on a wide range of outcomes related examined institutional distance used none of the to MNC strategies and organizational actions. The three institutional theories discussed above, possibility of tailoring the application to a speciﬁc employing instead other theoretical lenses, for issue by selecting relevant institutional parameters example, learning theory (e.g., Perkins, 2014; Pow- further increases the capacity to explain outcomes ell & Rhee, 2016). of interest. Another facilitating factor for the use of organizational institutionalism is the growing Table 1 Theoretical tradition in institutional distance research Organizational Institutional Combination Other Total institutionalism economics Org. inst. and Other Other Controlled Inst. econ. theory No. of papers in a speciﬁc tradition 38 28 17 5 13 36 137 Use of unidimensional term Generic ‘‘institutional distance’’ 12 14 9 1 8 27 72 Use of multidimensional pillars Formal distance only 0 3 0 0 0 0 3 Informal distance only 0 0 0 0 0 0 0 Formal + informal distance 3 9 6 0 1 3 22 Regulatory distance only 4 2 0 3 3 2 14 Normative distance only 1 0 0 0 0 0 1 Cognitive distance only 0 0 0 0 0 0 0 Regulatory and normative distance 7 0 2 1 1 3 14 Regulatory and cognitive distance 0 0 0 0 0 0 0 Normative and cognitive distance 1 0 0 0 0 0 1 Reg. and Norm. and Cogn. distance 10 0 0 0 0 1 11 Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al availability of reliable, accessible, and often longi- Rasheed, 2018; Jung & Lee, 2018) or various subsets tudinal secondary data, measuring various institu- as control variables (e.g., Schwens, Zapkau, tional facets provided by the World Bank and other Brouthers, & Hollender, 2018; Valentino, Schmitt, institutions (e.g., Heritage Foundation). As will be Koch, & Nell, 2018). None of these studies, how- discussed below, the easy access to data on these ever, are clearly positioned in the comparative dimensions appears to be an important factor in institutionalism theoretical tradition, because they the more common use of those institutional do not theorize at the level of the conﬁguration. dimensions, for which there is an abundance of Theoretically, it is difﬁcult to link the notion of data. distance with the conﬁgurational idea of compar- The use of the institutional economics perspec- ative institutionalism, which is conceptually closer tive has increased steadily, especially in the last few to difference rather than distance. Shifting from years: 21 of 28 papers in this camp have been difference to distance is not as easy as the similar published in the last 5 years. We attribute this to wording might make it appear. Fortwengel (2017)is the rise of emerging markets and their role in a recent attempt to strengthen the theoretical international business, and to the growing research underpinnings of comparative institutionalism in devoted to studying that context, which brings distance research. He proposes four characteristics forth the issues of quality of institutional environ- of institutional conﬁgurations—coordination, ments, ‘‘institutional voids’’, and substitutability of strength, thickness, and resources—and conceptu- formal and informal institutions (e.g., Khanna alizes distance as the difference between these et al., 2005; Peng, Wang, & Jiang, 2008). Institu- characteristics. Overall, the application of this tional economics is well suited to studying those perspective in distance research is in its infancy contexts. In addition, institutional economics and raises serious questions about the appropriate- applications have also beneﬁted from the availabil- ness of comparative institutionalism in this line of ity of secondary institutional data that can be used work. Due to the small number of associated to quantify formal and informal institutions, for studies, we could not include them in the meta- example, World Bank Governance Indicators, the analysis and Table 1. Economic Freedom Index, and the Global Compet- itiveness Index (see Table 3 below). Overall, in later METHODOLOGICAL APPROACHES work, we ﬁnd that organizational institutionalism IN INSTITUTIONAL DISTANCE RESEARCH has been gradually supplemented by institutional In addition to the diversity in theorizing on economics. While the volume of papers applying institutional distance, this literature is also charac- organizational institutionalism has been relatively terized by diversity in methodological approaches. stable over time, its relative share in all distance Below is a brief review of the most common research has gone down from 33% from 2002 to approaches employed. 2014 to 25% in the period after 2014. The use of comparative institutionalism in dis- Operationalization tance research is rather limited, despite the growing Table 1 shows that operationalizations vary, gener- interest of international business scholars in this ally depending on the particular institutional per- perspective (Aguilera & Grøgaard, 2019; Jackson & spective employed. Most studies take a Deeg, 2019). There are a few studies that draw on multidimensional approach. Research following Berry et al. (2010) and apply the Mahalanobis organizational institutionalism typically utilizes methodology for calculating institutional distance. Scott’s (1995) ‘‘three pillars’’ of regulatory, cogni- They vary widely, with the type and number of tive, and normative institutions, and constructs institutional dimensions considered ranging from distance measures accordingly. Many papers use a the full set of nine (Kang, Lee, & Ghauri, 2017)toa separate measure for each of the three distances— subset of a selected few or even a single dimension regulatory, cognitive, and normative distances (e.g., Pinto, Ferreira, Falaster, Fleury, & Fleury, (e.g., He, Brouthers, & Filatothev, 2013)—but some 2017). Lindner, Muellner, and Puck’s (2016) study, collapse normative and cognitive distances and which uses four of the nine dimensions related to construct one measure to capture both of them the regulatory and normative domains, exempliﬁes together (e.g., Gaur & Lu, 2007; Jensen & Szulanski, the typical application. There are also studies that 2004). A number of papers focus on the regulatory select one dimension, mostly administrative dis- and normative distances only (e.g., Ang, Benischke, tance (e.g., Ahrens et al., 2018; Brown, Yas ¸ar, & Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al & Doh, 2015; Madsen, 2009), and construct sepa- market-supporting institutions and measure it rate measures for each of them (Gaur & Lu, 2007; through a single index. Zhou et al. (2016) also use Gaur et al., 2007; Xu et al., 2004). Among the three a single index to measure institutional distance, distances, regulatory distance is the one most focusing on business-related laws and regulation, frequently studied. Scott himself has always pre- which they suggest reﬂect the ‘‘rules of the game in sented the pillars as analytic conceptual tools, a society’’. Hence, a signiﬁcant proportion of the while explicitly acknowledging that the elements papers employing organizational institutionalism associated with the pillars are often jointly at work do not sufﬁciently leverage the three pillars dis- and may change over time (Scott, 2014). cussed by Scott (1995). Even when they use Scott’s Research grounded in institutional economics framework in the theoretical development, they distinguishes between formal and informal institu- rarely utilize the three aspects of institutional tions (North, 1990, 1991) and constructs separate distance in operationalizing and measuring the distance measures for each of them (e.g., Abdi & construct. This is also common in papers grounded Aulakh, 2012; Dikova et al., 2010; Estrin et al., in institutional economics, which either use a 2009). Some papers examine only the effects of generic term of institutional distance without formal institutional distance (e.g., Zhou, Xie, & specifying the nature of the different institutions, Wang, 2016) or informal institutional distance or, even when they do so theoretically, settle on (e.g., Sartor & Beamish, 2014; Schwens, Eiche, & using only one type of institutions empirically, Kabst, 2011) on their outcome variables, and thus usually formal institutions. construct one measure for that particular type. Measurement There are exceptions to the multidimensional Measures of institutional distance are quite diverse. operationalization of institutions and institutional They vary between multidimensional collapsed distance. As seen in Table 1, some papers take more into single-index (e.g., Pinto et al., 2017), single- of a reductionist approach and measure institu- index (e.g., Somaya & McDaniel, 2012), absolute tional distance as a unidimensional construct (e.g., difference (e.g., Liou, Chao, & Yang, 2016; Liou, Dellestrand & Kappen, 2012; Lahiri, Elango, & Chao, & Ellstrand, 2017), weighted absolute-differ- Kundu, 2014). Most of these studies use institu- ence (Chao & Kumar, 2010), Euclidean distance tional distance as a control (27 of the 72 studies), (e.g., Gaur & Lu, 2007), Mahalanobis distance (e.g., although there are a number of papers where Berry et al., 2010; He et al., 2013), positive and institutional distance is a main variable that follows negative distance measures (e.g., Trapczynski & the same unidimensional approach. Twelve of the Banalieva, 2016), and other variations. Table 2 38 studies classiﬁed as organizational institutional- presents a summary of the data sources used for ist, and 14 of the 28 rooted in institutional the different distance operationalizations. economics, take a unidimensional approach. In Initially, institutional distance (grounded in most of these papers, the authors recognize the organizational institutionalism) was measured multidimensionality of the construct in their the- through a speciﬁcally constructed survey instru- oretical discussions, but reduce it to one dimension ment that captured its three dimensions, regula- when it comes to operationalization, usually choos- tory, cognitive, and normative (Kostova, ing an institutional variable that is easy to explain 1996, 1997). In addition to capturing all three and for which there are readily available data. pillars, this approach was argued to be superior to For example, in their study of cross-border alternative country-level measures because the sur- acquisitions, Lahiri et al. (2014) discuss both formal vey was anchored in a particular issue domain: and informal institutions when theorizing on the quality and quality management, assessing the institutional environment and institutional dis- regulations, social knowledge, and cultural norms tance, but use only formal institutions to represent related to the speciﬁc issue of quality. The same institutional distance, stating that ‘‘institutional approach was followed by other scholars who distance measures the difference in the develop- developed surveys to measure the favorability of ment of formal institutions between acquirer and institutional environments with regard to other target nation’’. Similarly, Gubbi, Aulakh, Ray, issues, for example, entrepreneurship (Busenitz Sarkar, & Chittoor (2010) state that ‘‘institutional et al., 2000) and market orientation (Kirca, Jay- distance captures the differences in normative, achandran, & Bearden, 2005). The issue-speciﬁc regulative, and cognitive constructs between two approach is consistent with organizational economies’’, but operationalize it as the strength of Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al Table 2 Operationalization of institutional distance by theoretical tradition (# of papers) Unidimensional Regulatory Normative Cognitive Formal Informal Total institutional distance distance distance institutional institutional distance (RD) (ND) distance distance World governance indicators 31 7 0 0 7 0 45 Economic Freedom Index 14 6 0 0 7 0 27 International country risk 20 0 0 3 0 5 guide Global competitiveness 311 0 0 0 0 14 report (RD) World competitiveness 27 0 0 1 0 10 yearbook (RD) Global competitiveness 0 0 14 0 0 0 14 report (ND) World competitiveness 00 7 0 0 2 9 yearbook (ND) Hofstede 0 0 0 6 0 15 21 Other 20 8 6 6 7 5 52 institutionalism, in particular with the notion of (2004) have been particularly inﬂuential in adopt- organizational ﬁeld, suggesting that countries ing this approach, as it suggested alternative sets of might be similar in some domains of economic items from the WCY and the GCR that could be and social life (e.g., rule-of-law), but signiﬁcantly used to measure regulatory and normative distance, different in other aspects (e.g., environmental respectively. The most glaring gaps in terms of protection). Measuring institutions and institu- using Scott’s three pillars relate to the cognitive tional distance by issue provides a more potent dimension. Many studies skip it altogether, espe- assessment of the institutional differences that cially when it comes to measurement, and half of really matter for the particular question under those that do provide measures on cognitive investigation. The alternative of using general distance use Hofstede’s cultural dimensions. For country-level measures such as regulatory quality example, Gaur et al. (2007) argue that cultural or rule of law, while meaningful for certain ques- distance is rooted in the cultural-cognitive dimen- tions, may be less informative for other speciﬁc sion of a nation’s institutional environment. Jensen research questions (Kostova, 1997). The subsequent and Szulanski (2004) operationalized institutional literature has departed from the domain-speciﬁc distance as cultural distance, and measured it using and survey-based measurement approach, using the Kogut and Singh cultural distance index (1988), instead a variety of more generic country-level arguing that it captures both the cognitive and measures based on secondary data to capture normative dimensions. whatever institutional dimensions are hypothe- Work in the institutional economics tradition sized in the theoretical models. This shift can most often uses data from WGI and the EFI. These partly be explained by the increased availability sources are typical for studies using a unidimen- and quality of such data. sional distance index, and are also commonly used In the organizational institutionalism tradition, to measure formal institutional distance in two- regulatory distance is most commonly measured dimensional operationalizations. Informal distance with World Governance Indicators (WGI) (World is measured primarily by Hofstede’s cultural dimen- Bank), the Economic Freedom Index (EFI) (Heritage sions (Hofstede, 1980, 2001), although there are Foundation), the World Competiveness Yearbook exceptions where scholars employ alternative cul- (WCY) (IMD), or the Global Competitiveness tural frameworks. For example, Estrin et al. (2009) Report (GCR) (World Economic Forum). A different use both Hofstede and GLOBE-based indexes to set of items from these same databases has been measure informal institutional distance. It is fair to used to measure normative distance. Studies by say that the typical institutional distance study in Gaur and Lu (2007), Gaur et al. (2007) and Xu et al. the institutional economics tradition measures Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al Table 3 Most used measures of institutional distance Type of Measure Data source distance Regulatory World Governance Indicators World Bank 1. Voice and accountability http://info.worldbank.org/governance/wgi/#home 2. Political stability and absence of violence 3. Government effectiveness 4. Regulatory quality 5. Rule of law 6. Control of corruption Economic Freedom Index Heritage Foundation 1. Property rights https://www.heritage.org/index/ 2. Freedom from corruption 3. Fiscal Freedom 4. Government spending 5. Business freedom 6. Labor freedom 7. Monetary freedom 8. Trade freedom 9. Investment freedom 10. Financial freedom Global Competitiveness Report World Economic Forum 1. Anti-trust policy in your country effectively promotes https://www.weforum.org/reports/the-global- competition competitiveness-report-2017-2018 2. The legal system in your country is effective in enforcing Item selection introduced by Xu et al. (2004) commercial contracts 3. Private business can ﬁle suits at independent courts if there is a breach of trust on the part of the government 4. Citizens of your country are willing to accept legal means to adjudicate disputes rather than depending on physical force or illegal means 5. The chance that the legal and political institutions drastically chance in the next ﬁve years is low 6. Your country’s police are effective in safeguarding personal security so that this is an important consideration in business activity World Competitiveness Yearbook IMD Business School 1. Fiscal policy https://www.imd.org/wcc/world-competitiveness- 2. Antitrust regulation center-rankings/World-competitiveness-yearbook- 3. Political transparency ranking/#WCO 4. Intellectual property protection Item selection introduced by Gaur and Lu (2007) and 5. Judiciary system efﬁciency Gaur et al. (2007) 6. Rarity of market domination in key industries 7. Fiscal policy (inﬂation) Normative Global Competitiveness Report World Economic Forum 1. Product design capability is heavily emphasized https://www.weforum.org/reports/the-global- 2. Firms in country pay close attention to customer satisfaction competitiveness-report-2017-2018 3. Staff training is heavily emphasized Item selection introduced by Xu et al. (2004) 4. Willingness to delegate authority to subordinates is generally high 5. Compensation policies link pay closely to performance 6. It is more common for owners to recruit outside professionals than to appoint children or relatives 7. Corporate boards are effective at monitoring management performance and represent shareholder interests Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al Table 3 (Continued) Type of Measure Data source distance Global Competitiveness Yearbook IMD Business School 1. Adaption of political system to economic challenges https://www.imd.org/wcc/world-competitiveness- 2. Adaption of government policies to new economic realities center-rankings/World-competitiveness-yearbook- 3. Transparency of government toward its citizens* ranking/#WCO 4. Political risk rating Item selection introduced by Gaur & Lu (2007); Gaur 5. Degree to which bureaucracy hinders economic et al. (2007) development Cognitive Hofstede Hofstede (2001) 1. Power distance http://geerthofstede.com/research-and-vsm/ 2. Individualism/collectivism dimension-data-matrix/ 3. Masculinity/femininity 4. Uncertainty avoidance 5. Long-term orientation/short-term orientation 6. Indulgence/restraint GLOBE House et al. (2004) 1. Performance orientation http://globeproject.com/study_2004_2007#data 2. Assertiveness 3. Future orientation 4. Humane orientation 5. Institutional collectivism 6. Institutional collectivism 7. Gender egalitarianism 8. Power distance 9. Uncertainty avoidance Formal Same as regulatory institutional distance – Informal Same as cognitive institutional distance – *item is taken from Country Risk ratings: Euromoney formal distance, using either the WGI or the EFI, (institutional economics) as well as cognitive and and informal distance using Hofstede’s cultural normative distance (organizational institutional- dimensions. The latter is commonly operational- ism) is more problematic, because it is not true to ized using the Kogut and Singh index of cultural the conceptual essence of these constructs. Hofst- distance (Kogut & Singh, 1988). Table 3 presents ede’s indexes represent cultural value dimensions, the different measures and sources of data used in while the cognitive institutional aspect is supposed institutional distance research. to capture the ‘‘taken for granted’’ habitual ways of doing certain things in a society. An extreme Concerns example of how these might be disconnected can Our analysis of operationalization and measure- be offered around the issue of corruption. Most ment of institutional distance suggests several countries would not view corruption as ‘‘the right points of attention, if not concern. First, the same thing to do’’ (value judgment), but in many it is data are used to measure institutional variables that ‘‘how things get done around here’’ (cognitive belong to different theoretical traditions. In the habituality). Even more problematic is the use of case of regulatory distance (organizational institu- cultural indexes to measure informal institutions. tionalism) and formal distance (institutional eco- In North’s framework, informal institutions are nomics), this is less of a problem given that Scott important because they can serve as complements, himself builds this link, referring to North when or, in some cases, as substitutes for weak formal discussing regulatory distance (Scott, 1995, 2014). institutions. Thus, the function of informal insti- However, the interchangeable use of Hofstede’s tutions is to help coordinate economic and social cultural dimensions in measuring informal Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al transactions and interactions in a society, especially In light of the proliferation of theoretical and in the absence of strong formal institutions. Cul- methodological approaches discussed above, we ture, in Hofstede’s framework, has not been con- were also interested in assessing, to the extent ceptualized as either a formal or an informal market possible, whether particular theoretical perspec- coordination mechanism. The level of power dis- tives, operationalizations, and measurements are tance or masculinity, for example, is not concep- more potent than others in providing insights into tually linked to facilitating economic transactions. certain organizational outcomes. What sources of Also, in many articles within the organizational data seem to be more informative in capturing the institutionalist tradition, regulatory and normative effects of institutional distance? Are results sensi- distance have both been measured using a variety tive to the use of different measurement methods of databases. This raises the more fundamental (e.g., Euclidean vs. Mahalanobis)? In this effort, we question of whether results obtained for the same supplemented our literature review with a rigorous dependent variable depend on the particular mea- meta-analysis of the empirical studies in the sam- sure used. As Beugelsdijk et al. (2018a) show, the ple. A total of 137 papers were included, providing correlation between distance indexes based on WGI sufﬁcient sample size for this technique. A list of and EFI is low, suggesting that these databases these studies can be found in the ‘‘Appendix’’. cannot be used interchangeably, thus raising ques- Overall, most of the papers examined the impact tions on the sensitivity of empirical ﬁndings. of institutional distance on ﬁrm performance and internationalization, including different stages of the internationalization process, such as location MAIN FINDINGS IN INSTITUTIONAL DISTANCE choice, and entry and establishment mode. To our RESEARCH surprise, in our sample, there were fewer papers A key question in our study concerned the various (not sufﬁcient for conducting a meta-analysis) that outcomes that have been linked to institutional linked institutional distance to management and distance in research. We identiﬁed 20 different organizational issues such as transfer of practices or outcomes in the full sample of 171 papers. The headquarters control (e.g., Kostova & Roth, 2002; most investigated outcome is ﬁrm performance Dellestrand & Kappen, 2012) Speciﬁcally, of all the (e.g., Gaur & Lu, 2007; Lazarova, Peretz, & Fried, statistical relationships included in our meta-anal- 2018; Shirodkar & Konara, 2017). Other frequently ysis, 50% were on performance, closely followed by examined outcomes include ownership structure entry mode (full or partial ownership) (39%). The (e.g., Ilhan-Nas, Okanb, Tatogluc, Demirbag, number of location choice (5%) and establishment Woode, & Glaisterf, 2018; Powell & Rhee, 2016; mode (greenﬁeld or acquisition) (6%) studies is Xu et al., 2004), location choice (e.g., Madsen, rather limited. Thus, we could only evaluate the 2009; Romero-Martinez, Garcia, Muina, Chidlow, methodological questions with respect to opera- & Larimo, 2019; Xu & Shenkar, 2002), headquar- tionalization and measurement in studies on per- ters–subsidiary relationship (e.g., Dellestrand & formance and entry mode. For that reason, we Kappen, 2012; Li, Jiang, & Shen, 2016; Valentino present the results for performance and entry mode et al., 2018), and entry mode (e.g., Brouthers, in the main text, and delegate detailed results on Brouthers, & Werner, 2008; Ang et al., 2015). location choice and establishment mode to the Cross-border mergers and acquisitions deal aban- ‘‘Appendix’’. donment/completion (e.g., Bhaumika, Owolabib, & Sarmistha, 2018; Dikova et al., 2010), establish- MNC and Subsidiary Performance ment mode/type (e.g., Arslan, Tarba, & Larimo, As shown in Table 4, we ﬁnd that institutional 2015; Estrin et al., 2009), and cross-border transfer distance generally has a negative effect on ﬁrm of organizational practices (e.g., Jensen & Szulan- performance, including almost all types of perfor- ski, 2004; Kostova, 1999) have also been studied a mance used, i.e., accounting, market, and survival few times. Other outcomes have only been exam- measures. Survival of a foreign market entry expe- ined once or twice, for instance, MNEs’ legitimacy rienced the most detrimental effect of institutional and isomorphism (e.g., Kostova & Zaheer, 1999; distance. Market-based performance was the only Salomon & Wu, 2012). It can therefore be con- type that was not signiﬁcantly impacted by insti- cluded that institutional distance has been tutional distance (although the sign of the effect employed in a wide variety of studies. was also negative). Interestingly, the negative effect of institutional distance on performance is about Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al Table 4 HOMA results for institutional distance and performance Predictor Kn Mean (p value) SE Q test I Pearson product-moment correlation (r) and partial correlation coefﬁcients (r ) xy.z Institutional distance to performance 467 1,370,095 - 0.024 (0.000) 0.004 7676.26 0.94 Unidimensional institutional distance to performance 189 980,011 - 0.022 (0.001) 0.007 5808.56 0.97 Regulatory distance to performance 114 240,834 - 0.038 (0.000) 0.006 770.05 0.85 Normative distance to performance 60 87,648 - 0.021 (0.074) 0.011 533.23 0.89 Cognitive distance to performance 12 2,710 - 0.012 (0.596) 0.019 15.70 0.17 Formal distance to performance 50 29,872 0.001 (0.925) 0.014 212.09 0.76 Informal distance to performance 42 29,020 - 0.028 (0.012) 0.011 107.80 0.60 Institutional distance measurement Euclidean distance 25 13,997 - 0.036 (0.001) 0.011 33.96 0.23 Kogut and Singh Index 101 202,732 - 0.053 (0.000) 0.016 3908.96 0.97 Mahanalobis 22 33,104 - 0.118 (0.000) 0.022 196.13 0.88 Differences 96 185,595 - 0.009 (0.059) 0.005 305.70 0.68 Other/unknown 223 934,667 - 0.009 (0.030) 0.004 1938.76 0.88 Data sources World governance indicators 89 797,747 - 0.018 (0.062) 0.010 5308.04 0.98 Economic Freedom Index 76 207,254 - 0.036 (0.000) 0.006 226.15 0.66 International country risk guide 16 21,626 0.007 (0.618) 0.014 41.49 0.59 Global competitiveness report (item set RD) 42 49,617 - 0.019 (0.019) 0.008 111.81 0.62 World competitiveness yearbook (item set RD) 16 37,545 0.033 (0.140) 0.023 145.85 0.88 Global competitiveness report (item set ND) 39 49,260 - 0.004 (0.476) 0.005 50.79 0.21 World competitiveness yearbook (item set ND) 18 37,977 - 0.041 (0.116) 0.026 239.43 0.92 Hofstede 39 11,173 - 0.002 (0.895) 0.018 116.49 0.66 Other 115 152,390 - 0.039 (0.000) 0.007 647.46 0.82 Performance types Accounting performance 182 973,417 - 0.011 (0.000) 0.004 1520.55 0.88 Market performance 45 50,431 - 0.002 (0.805) 0.008 128.58 0.64 Survey performance 91 15,069 - 0.037 (0.032) 0.017 392.48 0.77 Survival 38 89,312 - 0.058 (0.000) 0.015 556.50 0.93 Other 111 241,866 - 0.033 (0.014) 0.013 4077.05 0.97 Performance identity MNC 190 263,005 - 0.009 (0.031) 0.004 774.12 0.75 Subsidiary 248 1,067,968 - 0.040 (0.000) 0.000 6731.96 0.96 Published or not Published 428 1,345,450 - 0.024 (0.000) 0.004 7624.26 0.94 Unpublished 39 24,645 - 0.025 (0.035) 0.011 50.67 0.21 Multiple countries only Institutional distance to performance 213 869,122 - 0.009 (0.028) 0.004 1739.74 0.88 Unidimensional institutional distance to performance 101 681,564 - 0.000 (0.952) 0.005 1216.17 0.92 Regulatory distance to performance 22 129,475 - 0.006 (0.477) 0.008 118.96 0.81 Normative distance to performance 10 3089 - 0.018 (0.330) 0.018 8.94 0.00 Cognitive distance to performance – – – – – – Formal distance to performance 39 26,748 - 0.021 (0.156) 0.015 165.28 0.76 Informal distance to performance 36 27,006 - 0.034 (0.004) 0.012 91.81 0.60 four times stronger (i.e., more negative) on sub- the effect of formal distance (institutional eco- sidiary performance (b = - 0.040; p = 0.000) than nomics) is insigniﬁcant (b = - 0.001; p = 0.925), on the performance of the MNC as a whole the effect of regulatory distance (organizational (b = - 0.009; p = 0.031). This ﬁnding is consistent institutionalism) is negative and signiﬁcant with a recent study on cultural distance (Beugels- (b = - 0.038; p = 0.000). We also ﬁnd a signiﬁcant dijk et al., 2018b). negative effect when institutional distance is mea- Furthermore, we observe some interesting differ- sured unidimensionally (b = - 0.022; p = 0.001) ences depending on the theoretical tradition and (often using the same indicators as for formal and institutional dimensions used. Speciﬁcally, while regulatory distance). For a more reﬁned analysis, we Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al further replicated the test on a smaller sub-sample correlation between the different institutional of papers that used both multiple home and dimensions (Berry et al., 2010). multiple host countries. The reason is that there The analysis of the impact of the data source used has been a concern in the literature (Brouthers, is less straightforward due to the variety in mea- Marshall, & Keig, 2016; van Hoorn & Maseland, sures and data sources, as well as the interchange- 2016) that studies which use one home and mul- able use of overlapping data for different tiple host countries might in fact be capturing institutional dimensions and variables. We do not ‘‘proﬁle’’ rather than ‘‘distance’’ effects. In those have a sufﬁcient number of studies to provide a cases, results are driven by the institutional char- comprehensive analysis of all possible methodolog- acteristics of the host country regardless of how ical effects slicing the sample by database, distance ‘‘distant’’ it is from the home country. This is dimension, and sample structure used. What we especially relevant when the focus is on regulatory can say, however, is that, speciﬁcally for those and formal institutions. Interestingly, as seen in distance dimensions that are most at risk of Table 4, in this smaller and stricter subsample, we conﬂating distance and proﬁle effects (i.e., formal, found no signiﬁcant performance effect for formal, regulatory, and unidimensional), we ﬁnd regulatory, and unidimensional measures of insti- notable differences in results depending on the tutional distance. There is a negative and signiﬁ- data source used. For example, there is a negative cant effect of informal distance (most often and signiﬁcant coefﬁcient for distances using the measured by Hofstede’s cultural dimensions) on WGI (b = - 0.018; p = 0.062), EFI (b = - 0.036; performance, again consistent with previous meta- p = 0.000), and the regulatory distances using the analyses on cultural distance and performance GCR item set (b = - 0.019; p = 0.019). In contrast, (Beugelsdijk et al., 2018b; Magnusson, Baack, both the regulatory distances using the WCY Zdravkovic, Satub, & Amine, 2008). We believe (b = 0.033; p = 0.140), and the International Coun- that these results are among the most interesting try Risk (ICR) guide (b = 0.007; p = 0.618) ﬁnd a analytical ﬁndings in our review, showing that positive but insigniﬁcant coefﬁcient. methodological approaches, including sample Entry Mode structure (number of home and host countries), Table 5 presents summary results for the relation- and the particular measurement approach ship between institutional distance and entry employed, matter greatly for the results, even to mode. Entry mode refers to the degree of ownership the extent that they may render institutional taken by an MNC in a foreign venture. In the distance insigniﬁcant. primary studies, entry mode is most frequently The meta-analytical technique allowed us to also measured as a continuous variable or percentage of test for possible contingency effects of the way ownership (167 correlations; e.g., Malhotra & Gaur, institutional distance is measured in terms of both 2014), followed by a dummy variable taking the method and data source. Table 4 shows that the value of 1 for full ownership and 0 for partial (162 vast majority of the papers use either the Kogut and correlations; e.g., Gaur & Lu, 2007), and a categor- Singh index or another Euclidean distance index, ical variable of minority versus majority versus and that both approaches ﬁnd a negative and wholly-owned (35 correlations; e.g., Xu et al., signiﬁcant relationship with performance. Studies 2004). using the Mahalanobis distance (Berry et al., 2010) Similar to performance, we ﬁnd an overall neg- show the strongest negative relationship with per- ative and signiﬁcant relationship between institu- formance (b = - 0.118; p = 0.000). Studies that tional distance and entry mode. Greater simply take the difference between the home and institutional distance is associated with lower a host country score on an indicator (b = - 0.009; commitment in terms of degree of ownership, p = 0.059), or in which it is unclear what method is irrespective of the way entry mode is operational- used to measure distance, also have a negative and ized (dummy, continuous, or categorical) signiﬁcant relationahip (b = - 0.009; p = 0.030). It (b = - 0.029 and p = 0.000). Also similar to perfor- therefore appears that all these measurement meth- mance, we ﬁnd opposing results for formal distance ods are effective in capturing the relationship (insigniﬁcant with b = - 0.016 and p = 0.348), reg- between institutional distance and performance. ulatory distance (signiﬁcant with b = - 0.049 and The Mahalanobis method is perhaps preferable p = 0.005), and a unidimensional operationaliza- given its unique ability to also account for the tion of institutional distance (insigniﬁcant with Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al Table 5 HOMA results for institutional distance and entry mode/degree of ownership Predictor Kn Mean (p value) SE Q test I Pearson product-moment correlation ) and partial correlation coefﬁcients ) xy.z Institutional distance to entry mode 364 862,885 - 0.029 (0.000) 0.006 10,073.72 0.96 Unidimensional institutional distance to entry mode 109 336,779 0.003 (0.685) 0.008 1616.81 0.93 Regulatory distance to entry mode 72 247,806 - 0.049 (0.005) 0.017 4948.15 0.99 Normative distance to entry mode 55 163,697 - 0.034 (0.059) 0.018 2608.68 0.98 Cognitive distance to entry mode 28 67,548 - 0.041 (0.000) 0.011 175.04 0.83 Formal distance to entry mode 44 21,873 - 0.016 (0.348) 0.017 232.90 0.81 Informal distance to entry mode 56 25,182 - 0.069 (0.000) 0.013 205.06 0.72 Entry mode measurement Dummy 162 598,204 - 0.019 (0.019) 0.008 5474.57 0.97 Categorical 35 18,909 - 0.056 (0.019) 0.024 298.26 0.88 Continuous 167 245,772 - 0.034 (0.000) 0.009 3076.70 0.95 Published or not Published 351 847,947 - 0.029 (0.000) 0.006 10,018.75 0.96 Unpublished 13 14,938 - 0.046 (0.006) 0.017 43.27 0.68 Multiple countries only Institutional distance to entry mode 113 367,647 - 0.044 (0.000) 0.009 2357.68 0.95 Unidimensional institutional distance to entry mode 29 267,886 - 0.028 (0.031) 0.013 708.89 0.96 Regulatory distance to entry mode – – – – – – Normative distance to entry mode – – – – – – Cognitive distance to entry mode – – – – – – Formal distance to entry mode 35 18,700 - 0.006 (0.746) 0.019 177.54 0.80 Informal distance to entry mode 43 21,363 - 0.071 (0.000) 0.015 146.70 0.70 b = 0.003 and p = 0.685). We do not have a sufﬁ- p = 0.027). We interpret this as support for our cient number of studies to look into the effect of more general observation that, to understand sample structure on the various distances, but, as institutional distance effects, it is critical to distin- seen in Table 5, in studies with multiple home and guish distance effects from the direct (i.e., ‘‘proﬁle’’) host countries, the effect of formal distance is not institutional effects of the respective country. The signiﬁcant (b = 0.006 and p = 0.746). We present latter conclusion also applies to location choice this result with caution given the small number of studies. Here, we ﬁnd a general negative and such studies in our sample which do not allow signiﬁcant relationship between institutional dis- drawing deﬁnitive conclusions (the number of tance and location choice (b = - 0.028; p = 0.087), correlations is 35). In contrast, informal distance but this effect turns insigniﬁcant in studies using appears to be rather stable, showing a negative and multiple home and host countries (b = - 0.017; signiﬁcant effect on entry mode (b = - 0.069 and p = 0.343). p = 0.000) irrespective of sample structure (b = - 0.071 and p = 0.000 for the sample with THE STATE OF INSTITUTIONAL DISTANCE multiple home and host countries). RESEARCH Our review of the 171 papers combined with the Establishment Mode and Location Choice meta-analysis on 137 of them provides sufﬁcient We ﬁnd no signiﬁcant relationship between insti- grounds for evaluating the current state of institu- tutional distance and establishment mode (acqui- tional distance research. We can conclude that sition vs. greenﬁeld; b = 0.021; p = 0.146). The institutional distance has ﬁrmly established itself as number of establishment mode studies using mul- one of the core constructs in international business tiple dimensions (either formal–informal, or regu- research, and has enriched our understanding of a latory–normative–cognitive) is too small to draw number of important phenomena for ﬁrms doing robust conclusions (detailed results in the ‘‘Ap- business across borders. Moreover, a diverse set of pendix’’). Interestingly, the institutional distance methods and measures have been developed and effect becomes positive and signiﬁcant in studies used for capturing institutional distance, and there using multiple home and host countries (b = 0.035; Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al even seems to be an emerging convergence on effects of institutional distance. This results in a some best practices in methodology. rather generic discussion without deep institutional At the same time, our review uncovered certain explanations and a somewhat superﬁcial applica- problems, showing that this literature can some- tion of the construct as a ‘‘one-size-ﬁts-all’’ or times be ill-deﬁned theoretically and less than ‘‘catch-all’’ treatment of country differences. Ulti- rigorous empirically. This is reminiscent of past mately, it reﬂects a simplistic view on the impact of critiques of cultural distance research (Kirkman institutional distance affecting all phenomena of et al., 2006; Maseland, Dow & Steel, 2018; Shenkar, cross-border nature in a similar and negative way. 2001; Tung & Verbeke, 2010; Zaheer et al., 2012), Our observation is that this problem is particularly although it is our impression that these issues are common in studies conceiving of institutional even more pervasive for institutional distance. This distance as a unidimensional construct (see is perhaps so because cultural distance research has Table 1). been around longer and has matured as a ﬁeld of Second, the three institutional perspectives differ inquiry (Cuypers, Ertug, Heugens, Kogut, & Zhou, in their main theoretical theses, which are 2018). While the concept of culture is equally broad anchored, respectively, in distinct disciplines, soci- and multi-faceted as institutions, international ology, economics, and political science, and asso- business scholars have converged on using a nar- ciated with distinct levels of analysis, theoretical rower subset of culture theories and frameworks explanations, assumptions, and boundary condi- (e.g., Hofstede, 1980; House, Hanges, Javidan, tions. When papers mix perspectives indiscrimi- Dorfman, & Gupta, 2004; Schwartz, 1994, 1999; nately, they run the risk of logical inconsistency in Peterson & Barreto, 2018), allowing a more precise their predictions. As discussed above, organiza- and consistent theorizing on the effects of cultural tional institutionalism and institutional economics distance. There has not been such a maturation of may, but need not, make the same predictions on the institutional distance research. On the con- the impact of distance on ﬁrms. For example, trary, there seems to be a continuing proliferation examining the challenges of entry of emerging of conceptualizations and applications. This might market ﬁrms going to developed economies, orga- also be partially caused by the richness of the nizational institutionalism is likely to suggest a institutional perspective as well as the abundance negative impact of distance, while institutional of country-level secondary data of institutional economics might emphasize the positive learning nature. Below, we discuss several key problematic opportunities for the ﬁrm entering an institution- areas and suggest ways in which this area of ally developed and stable market. Equally problem- research can be streamlined and strengthened. atic is the common practice that we observed of equating culture with informal institutions and Theoretical Ambiguities also with the cognitive or normative pillars from We found that the papers in our study are not Scott’s framework. sufﬁciently explicit and precise with regard to the A related theoretical problem concerns the rigor particular strand of institutional theory they draw of the presented explanatory mechanisms of insti- upon, whether organizational institutionalism, tutional distance effects. Although most of the institutional economics, or comparative institu- papers reviewed provide some theoretical explana- tionalism. There are exceptions where authors tions, many reiterate similar arguments in linking clearly and consistently anchor their theoretical different institutional variables to different organi- models and methodologies in a particular perspec- zational outcomes. For example, formal and regu- tive (e.g., Dikova, Sahib, & Witteloostuijn, 2010; latory institutions have been suggested to inﬂuence Estrin et al., 2009; Kostova, 1996; Madsen, 2009). a number of different outcomes based on the same However, many papers lack such clarity, either not set of standard explanations, often referring to specifying the perspective they take or mixing ideas increasing costs of doing business abroad. This is from multiple perspectives, muddling the theoret- also often the case for informal institutions or ical argumentation (see Tables 1, 2). This can lead cognitive and normative pillars. Furthermore, some to at least two problems. papers that treat institutional distance as multidi- First, when a paper is not clearly anchored in a mensional do not always develop arguments for the particular institutional model, it is less likely to differential effects of the different pillars, proposing utilize its theoretical rigor and provide a precise and instead a generic distance effect and thus failing to sharp theoretical argumentation for the proposed Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al Table 6 Primary studies included in the meta-analysis 1. Abdi, M., & Aulakh, P. S. 2012. Do country-level institutional frameworks and interﬁrm governance arrangements substitute or complement in international business relationships? Journal of International Business Studies, 43(5): 477–497 2. Adamoglou, X., & Kyrkilis, D. 2018. FDI entry strategies as a function of distance—The case of an emerging market: Turkey. 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Journal of World Business, 50(4): 718–728 utilize the opportunities that the unique pillars or one host country. This analysis provides statis- provide for enriching the theory. tical evidence for concerns previously raised in the In our view, all of these critical shortcomings in literature about the potential dangers of conﬂating the existing literature on institutional distance can distance and direct (‘‘proﬁle’’) effects caused by be easily corrected by a more careful and disci- certain research design solutions (Brouthers et al., plined approach. The ﬁrst step in distance studies 2016; Harzing & Pudelko, 2016; van Hoorn & should be to specify the particular theoretical Maseland, 2016). The distinction between institu- perspective employed. The choice of which per- tional proﬁle (the set of regulatory, cognitive, and spective to use should be driven by what is most normative institutions in a given country) and theoretically appropriate given the phenomenon institutional distance (the difference of the institu- under study and the particular research question tional proﬁles of two countries) was recognized in asked. Is the story primarily one of social embed- the initial work in this area (Kostova, 1996). dedness in institutionalized ways of conducting However, it has been ignored in some subsequent certain functions that are consistent with rules and applications, by framing studies in terms of dis- regulation and are viewed as socially appropriate tance but presenting arguments based on the and legitimate? Or is it one of the quality of market institutional conditions of a host country (proﬁle). institutions and the related risks, uncertainty, and We often observed this conﬂation of distance and costs? Or is our research question best tackled proﬁle effects in work on entry or locational through the lens of a national system of institu- decisions or performance in emerging markets, tional order whereby different aspects of the envi- where authors describe distance effects by dis- ronment logically hang together? The answer to cussing the poor institutional conditions in the these questions will lead scholars to choose orga- target market (e.g., Romero-Martinez et al., 2019). nizational institutionalism (Scott, 1995), institu- There is an implicit assumption in these papers that tional economics (North, 1990, 1991), or the investor comes from an institutionally devel- comparative institutionalism (Hall & Soskice, oped home country, most often the US, which 2001; Whitley, 1999; Jackson & Deeg, 2008, 2019) means that the distance measures capture the as their main theoretical framework. Anchoring a deviation of the host countries’ institutional envi- study and explicitly conveying the chosen perspec- ronments from the mature market institutional tive provides a clear starting point and a solid environment at home. In this case, the sign of the foundation for building the arguments, developing difference between home and host tends to be the propositions and hypotheses, as well as design- always in one direction, from high to low quality of ing the proper methodology for conducting the institutions. Finally, it should be noted that dis- research. tance is not always the appropriate framing; some studies, because of their speciﬁc research questions, Distance versus Proﬁle should focus instead on the direct effects of insti- One of the most shocking ﬁndings in our review tutional proﬁle of a particular country (host or was the non-signiﬁcant relationship between three home). commonly used institutional distances (unidimen- Another fascinating result in our analysis showed sional, formal, and regulatory) and ﬁrm perfor- that this design issue (single home or host country) mance, which we found in the meta-analytical tests is not a problem for informal institutions, as in the smaller balanced sub-sample of studies using evidenced by the robust effects of informal and multiple home and host countries. This was in normative institutional distance. We believe this is contrast to the signiﬁcant relationship of these due to the distinct conceptual nature of formal variables in the imbalanced samples with one home versus informal institutions, in particular the Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al Table 7 HOMA results for institutional distance and location choice Predictor Kn Mean (p value) SE Q test I Pearson product–moment correlation (r) and partial correlation coefﬁcients (r ) xy.z Institutional distance to location choice 45 1,244,420 - 0.028 (0.087) 0.017 14,055.58 1.00 Unidimensional distance to location choice 14 300,720 - 0.007 (0.064) 0.003 52.70 0.72 Regulatory distance to location choice – – – – – – Normative distance to location choice – – – – – – Cognitive distance to location choice – – – – – – Formal distance to location choice 8 429,730 - 0.154 (0.002) 0.050 6669.95 1.00 Informal distance to location choice 8 429,730 0.033 (0.000) 0.007 99.35 0.91 Multiple countries only Institutional distance to location choice 39 1,170,286 - 0.017 (0.343) 0.018 13,951.58 1.00 Table 8 HOMA results for institutional distance and establishment mode Predictor Kn Mean (p value) SE Q test I Pearson product–moment correlation (r) and partial correlation coefﬁcients (r ) xy.z Institutional distance to establ. mode 8 47,669 0.021 (0.146) 0.014 405.20 0.85 Formal distance to establ. mode 17 3,283 0.039 (0.374) 0.055 154.60 0.88 Informal distance to establ. mode 17 3,283 0.092 (0.097) 0.055 154.60 0.88 Regulatory distance to establ. mode 4 2,364 0.085 (0.118) 0.054 20.25 0.75 Normative distance to establ. mode 4 2,364 0.059 (0.162) 0.042 12.15 0.59 Cognitive distance to establ. mode – – – – – – Unidimensional institutional distance to establ. mode 16 36,375 - 0.016 (0.316) 0.016 98.23 0.83 Multiple countries only Institutional distance to establ. mode 23 39,722 0.035 (0.027) 0.016 165.24 0.85 directionality of formal distance and the neutrality research has not yet arrived at standardized, sys- of informal distance. Especially in light of the tematic, and theoretically driven approaches with measures used for these variables (measuring infor- regard to the empirical use of this construct. This, mal institutions through Hofstede’s cultural value coupled with insufﬁcient justiﬁcation of the use of dimensions), it becomes clear that regulatory and particular measures in many papers, raises ques- formal institutional aspects range on a scale from tions about the rigor of this work and may lead unfavorable to favorable, poor to good, weak to some to believe that certain measures are being strong, while cultural values are just different across used out of convenience, even if they are not the countries. Paying attention to the distinction most appropriate theoretically and empirically. between institutional distance and proﬁle effects Furthermore, as discussed above, some studies use is critical for building stronger theoretical models the same data to measure different types and pillars and choosing proper empirical design accordingly. of institutions, sometimes from different institu- tional perspectives. This raises serious questions Measurement Ambiguities about the theoretical logic and the meaning of the Our review uncovered a number of areas of concern ﬁndings in particular studies: are they really due to with regard to operationalization and measurement institutional distance or some undeﬁned generic of institutional distance. There appears to be some variable that captures country? initial convergence on measures of formal and Another issue is the common use of country-level regulatory institutional distance, especially when it secondary data, which assess institutional environ- is operationalized as a general country-level con- ments in generic terms and at the country level, struct rather than in a domain-speciﬁc way (see and thus depart from the idea of issue speciﬁcity, Table 2). There is also an increasing number of particularly important in the organizational insti- authors who opt for measuring informal institu- tutionalism perspective. This is especially problem- tional distance with the Hofstede-based distance atic when the cognitive dimension of institutional index. However, our overall conclusion is that this environments is considered. Using country-level Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al measures of cultural values (e.g., Hofstede), which corruption, and strength of political institutions, we found to be a common approach, is a big all of which can be linked to North’s ideas of ease of departure from the original meaning of this dimen- doing business, market-supporting institutions, sion as the shared knowledge and the taken-for- transactions costs, and uncertainty. The EFI focuses granted ways of conducting certain business func- on the degree to which economic actors are free tions (Kostova, 1996). from government interference and government- While the literature on institutional distance is imposed constraints and regulations in different still in its growth and maturation stage, we believe areas of economic activity, such as the labor that there are ways in which these measurement market, capital market, trade policies, investment ambiguities can be addressed to improve validity regulations, and others. Using these sources inter- and rigor. For organizational institutionalism, the changeably may be inconsistent with the theories main remedies include: (1) carefully specify the employed. In our view, the EFI might have a slight level of analysis, as it can be ﬁeld, industry, ideological bend as it is anchored in neo-liberal country, or meta-environment; (2) try to choose philosophy and the assumption of free market or develop measures of the regulatory, cognitive, superiority. Thus, the WGI might be more in line and normative pillars that are issue-speciﬁc at that with the conceptual essence of North’s formal level, and (3) avoid using interchangeably the same institutions. measures for the different institutional dimensions Furthermore, the recent tendency to use Hofst- (e.g., normative measured through regulatory indi- ede-based cultural distance as a measure of infor- cators, or cognitive measured through Hofstede’s mal distance in the same perspective is cultural values). Ultimately, the goal should be to problematic. As we have discussed, culture does employ measures that capture in the best possible not adequately capture the idea of informality as a way the three-pillar aspects of the institutional substitute for weak formal institutions, as con- environment that are the closest to the phenomena ceived by North (1990, 1991). Cultural values are under study and thus are true to the theoretical different across countries, but they cannot be roots of this perspective. This can be done in at automatically assumed to have the capacity to least two ways. First, given the wide availability of substitute for deﬁcient formal institutions. For various databases nowadays capturing institutional example, it is hard to argue that Kogut and Singh’s context, researchers could identify measures that (1988) cultural distance index is a substitute for are close to the issue under study. For example, to poor rule of law or low investment freedom in a evaluate the institutional environment with regard country. Thus, researchers need to be more careful to CSR, one could look for secondary data that and precise in measuring informal institutions and describes regulations, social knowledge, and norms informal distance in this tradition. It might be related to CSR, as opposed to using some generic useful to start rethinking the way we have opera- country-level indicators. Alternatively, if such mea- tionalized informal institutions in this tradition. sures are unavailable or unsatisfactory, it would be Could we explore concepts that better capture the theoretically appropriate and worth the effort for informal mechanisms facilitating economic trans- scholars to develop a customized survey instrument actions and coordinated activities in a particular that measures the institutional environment for the country like guanxi in China (e.g., Xin & Pearce, particular domain of interest. Both of these 1996), networked capitalism in the form of keiretsu approaches are true to the theoretical logic of in Japan (e.g., Dyer, 1996), business groups in Latin organizational institutionalism. America and East Asia (e.g., Guillen, 2002; Khanna For the institutional economics perspective, & Palepu, 2000; Kim, Kim & Hoskisson, 2010), scholars should use measures and operationaliza- public social capital (Adler & Kwon, 2002; Putnam, tion of formal and informal institutions with 1993), and others? While these ideas require much caution. For example, we observed some recent further work, they seem to be closer to the notion convergence in using WGI and EFI for measuring of informal institutions in North’s sense than the formal institutional distance. However, it should be cultural value frameworks of Hofstede (1980)or understood that, while both of these databases Schwartz (1994, 1999). measure formal institutions in a given country, they focus on different aspects reﬂecting different institutional domains. WGI measure quality of governance, such as rule of law, degree of Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al research, providing numerous opportunities to study the cross-border impact on various strategic CONCLUSION International business scholars have signiﬁcantly and organizational outcomes. At the same time, it expanded institutional theory by exploring the has led to a number of ambiguities and problems in this area because international business scholars distinct cross-border condition that deﬁnes their have often failed to recognize and/or articulate the domain of inquiry (Westney, 1993; Zaheer et al. distinct theoretical and empirical implications of 2012). The introduction of the construct of insti- tutional distance, which develops the notion of the three perspectives. Thus, our overarching rec- institutional embeddedness to the international ommendation for strengthening distance research is to follow a more thoughtful and disciplined setting, and the voluminous work examining dis- approach, starting with a clear determination of tance effects on various business outcomes, exem- which institutional perspective is followed in a plify such contributions. Our review has documented the growth and proliferation of this particular paper and why. This would lead to better literature and has analyzed its current state based explanation of the mechanisms linking institu- tional distance to the outcomes of interest and on the three institutional perspectives: organiza- would drive the selection of appropriate measures tional institutionalism, institutional economics, ‘‘in sync’’ with the chosen perspective. Many of the and comparative institutionalism. We have synthe- sized the main ﬁndings and contributions in detailed suggestions presented above can be distance research, identiﬁed key theoretical and adopted almost immediately, putting the ﬁeld in the best possible position to build a reliable, empirical ambiguities in the literature, and sug- replicable, and generalizable stock of knowledge gested some concrete recommendations for on institutional distance. Others, for example, the strengthening this line of work. We believe that the richness of the institutional incorporation of comparative institutionalism into perspective reﬂected in its three strands has been distance research, are more challenging. extremely beneﬁcial for institutional distance REFERENCES Abdi, M., & Aulakh, P. S. 2012. Do country-level institutional Beugelsdijk, S., Ambos, B., & Nell, P. 2018a. 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APPENDIX This Appendix describes the details of the meta- Google Scholar, we searched across 19 top IB/IM analytic approach we followed including sampling journals for the key phrase: ‘institutional distance’ procedure, analytical method, and results details. and identiﬁed 549 papers. The journal included were: Academy of Management Journal, Academy of Management Review, Administrative Science Quarterly, Sample Strategic Management Journal, Journal of International We coded 137 empirical papers, listed at the end of Business Studies, Organization Science, Journal of Inter- this Appendix. This set of 137 is a subset of national Management, Journal of Management, Journal empirical studies of the 171 studies we included of Management Studies, Global Strategy Journal, Journal in our overall review of the literature. We collected of World Business, International Business Review, Asia the data in four rounds. In the ﬁrst round using Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al Paciﬁc Journal of Management, International Journal of institutional distance. Finally, we have included Management Reviews, Management International some study characteristics: speciﬁcally, whether or Review, Research Policy, Thunderbird International Busi- not the study has included multiple countries for ness Review, and European Journal of International both the home and host countries or if it is a single Management. We checked the papers published in country study, and whether or not it has been these journals manually to ensure that this was an published. Institutional distance was coded as empirical study. speciﬁed by the primary study. So, if the primary In the second round, we used additional search study refers to regulatory distance, it is coded as terms, including ‘‘institutional difference’’, ‘‘admin- such. If the primary study does not specify types of istrative distance’’, ‘‘regulatory distance’’, and ‘‘for- institutional distance, it is coded as unidimensional mal distance’’. Third, we applied snowballing on 14 institutional distance. This resulted in six varia- papers that introduced new measurements of insti- tions: unidimensional institutional distance, regu- tutional distance: Baik, Kang, Kim, & Lee (2013), latory distance, normative distance, cognitive Berry et al. (2010), Dikova (2009), Dikova et al. distance, formal distance, and informal distance. (2010), Estrin et al. (2009), Gaur & Lu (2007), Gaur As explained in the main text, doing so allows us to et al. (2007), Gubbi et al. (2010), He et al. (2013), distinguish between studies focusing on multidi- Lavie & Miller (2008), Li & Yao (2010), Petrou & mensional operationalization in the ‘‘Northean’’ or Thanos (2014), Salomon & Wu (2012), and Xu et al. the ‘‘Scottean’’ tradition. As explained in the main (2004). This process generated an additional set of text, we have also attempted to code empirical 496 articles. Finally, we have repeated the ﬁrst three papers in the comparative institutionalist tradition, rounds in January 2019 to include all papers mainly through the framework of Berry et al. published in 2017 and 2018, which yielded another (2010). However, the number of papers that dis- set of 465 articles. Of all these papers, we selected cussed one of the four dependent variables of those that used the institutional distance construct interest while simultaneously using the Berry in empirical models testing various outcomes et al. (2010) approach was too small to be used in related to international business. An additional our meta-analysis. criterion for inclusion in the meta-analysis was that With regard to the way in which institutional a certain correlation between institutional distance distance was constructed and measured, we identi- and a particular outcome (e.g., location choice) had ﬁed four different methods: Euclidean distance, the to appear in at least two studies by different authors Kogut and Singh Index, Mahanalobis, differences, and at least three correlations. The resulting dataset and other/unknown. We also coded which dataset for the meta-analysis included 954 correlations is used to operationalize institutional distance. The across 137 papers. Classifying these studies accord- main categories are: the WGI, the EFI, the ICR ing to the dependent (outcome) variable, we have: guide, the GCR (both the regulatory distance item 467 ID-performance correlations (84 papers), 364 set and the normative distance item set; Xu et al., ID-Entry Mode correlations (66 papers), 58 ID- 2004), the WCY (both the regulatory distance item Establishment Mode correlations (12 papers), and set and the normative distance item set; Gaur & Lu, 45 ID-location choice correlations (7 papers). As 2007; Gaur et al., 2007), Hofstede, and others. We some papers address multiple outcomes, the total would note that many studies that operationalized number of papers is less than the number of topics institutional distance also measured cultural dis- addressed. Table 6 lists all the studies included in tance (primarily using the Hofstede-based Kogut the meta-analysis. and Singh index) separately. As a result, there are studies that have operationalized formal and infor- mal institutional distance via the WGI and the Coding Hofstede-based Kogut and Singh cultural distance Our coding has focused on the type of institutional index, but there are also studies that have used the distance, how it has been operationalized, and the exact same datasets to operationalize unidimen- four different dependent variables (performance sional institutional distance and cultural distance. and entry mode for which we show results in the We have included both groups of studies in our main text, and location choice and establishment meta-analysis, but despite the empirical similarity mode for which we only show detailed results in we have coded them differently. The ﬁrst group is this ‘‘Appendix’’—see Tables 7, 8). We also coded coded as formal and informal distance (thus the way that studies have operationalized including cultural distance). The second group is Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al coded unidimensional institutional distance, and Similarly, a three-asterisk signiﬁcance indicates an cultural distance is not coded. The obvious reason is upper bound of 0.01 and a lower bound of 0; our focus on institutional distance. As the second therefore, we use a p value of 0.005. Consequently, group does not consider cultural distance to be part the p value is converted to either a t value or a of institutional distance, we consistently follow the z value (depending on which one is appropriate), argumentation of the authors of these primary and through the use of the t (or z) value, the PCC is studies, and code it accordingly. Based on the same calculated. Finally, when multiple measurements of argumentation, we have also not included studies the focal effect are reported in one study (e.g., due that only looked at cultural distance, and did not to the reporting of results for different operational- discuss institutional distance. Hence, if there is no izations of institutional distance, the use of multi- measurement whatsoever of institutional distance, ple samples, or through different the study is excluded. operationalizations of the dependent variable), we With regards to the dependent variables of this included all of them in our analyses. Monte Carlo study, we consider: performance, entry mode/de- simulations show that procedures using the com- gree of ownership, location choice, and establish- plete set of measurements outperform those repre- ment mode. Performance includes accounting, senting each study with a single value in areas like market, survey, and survival measures. Further- parameter signiﬁcance testing and parameter esti- more, we have distinguished between performance mation accuracy (Bijmolt & Pieters, 2001). of the MNC and performance of the subsidiary. We employ the Hedges–Olkin-type Meta-Analysis Entry mode was operationalized in three distinct (HOMA) to determine the mean size of the effect of ways. First, (JV vs. WOS) takes value 1 if WOS and 0 institutional distance on performance, location if JV. Second, categorical values are used, where choice, entry mode and establishment mode. We higher values indicated more ownership. Third, perform our computations using random-effects entry mode has been operationalized as a contin- HOMA, which accounts for potential heterogeneity uous value of the degree of ownership. Location in the effect size distribution and is more conser- choice was measured as a dummy variable assum- vative than ﬁxed-effects HOMA (Kisamore & Bran- ing the value of 1 if the country was chosen and 0 nick, 2008; Raudenbush & Bryk, 2002). To otherwise. Establishment mode (Greenﬁeld vs. accurately account for differences across effect Acquisition) takes value 1 if Acquisition or 0 if sizes, we weight each effect size by its inverse Greenﬁeld. variance weight, w, the inverse of the squared standard error (Hedges & Olkin, 1985). Method ABOUT THE AUTHORS For each paper, we collected both the bivariate Tatiana Kostova is Carolina Distinguished Profes- correlation (r) and the partial correlation coefﬁcient sor, the Buck Mickel Chair and Professor of Inter- (r ). To calculate the partial correlation coefﬁ- xy.z national Business at the Darla Moore School of cient we use the following procedure. First, we Business, University of South Carolina. Her calculate either a t value or a z value (depending on research focuses on MNE management and the used analysis of the paper) through: Beta/ includes topics like institutional embeddedness, Standard error = t(/z) value. Second, we use the institutional distance, institutional theory of the following formula for calculating the PCC: PCC = 2 2 MNE, cross-border transfer and adoption of prac- SQRT ((t )/((t ) + Degrees of Freedom)) 9 sign, or: 2 2 tices in MNEs, legitimacy, agency theory in HQ – PCC = SQRT ((z )/((z )+ N)) 9 sign (Greene, 2003). subsidiary dyads in MNEs. She is an AIB Fellow and Several papers in the sample did not include the has served as Vice President of AIB, Chair of the IM standard error or t value but reported the signiﬁ- Division of Academy of Management, and on many cance using asterisks. In order to derive a partial editorial boards. correlation coefﬁcient from these observations, we use the t (or z) value associated with the mean of Sjoerd Beugelsdijk is a Professor of International the indicated p value category. For instance, when a Business and Management at the University of study indicates that the observation has a two- Groningen, the Netherlands. He earned his PhD at asterisk signiﬁcance, it means that the upper bound Tilburg University and explores how cultural and of the p value is 0.05 and the lower bound of the institutional diversity affect international business. p value is 0.01; therefore, we use a p value of 0.03. Journal of International Business Studies The construct of institutional distance Tatiana Kostova et al He is currently serving as Reviewing Editor for JIBS. Committee Chair of the International Management In 2019 he received the JIBS silver medal for his Division of Academy of Management, and Com- contribution to the ﬁeld. munications Ofﬁcer of AIB Insights. W. Richard Scott received his PhD from the Marc van Essen (PhD Erasmus University) is an University of Chicago and is currently Professor Associate Professor of International Business at the Emeritus in the Department of Sociology with Darla Moore School of Business, University of courtesy appointments in the Graduate School of South Carolina. His research interests include Business, Graduate School of Education, School of comparative corporate governance, international Engineering, and School of Medicine, Stanford business, family business, and meta-analytic University. Scott is an organizational sociologist research methods. His works applying meta-analy- who has concentrated his work on the study of sis have been published or are forthcoming in the professional organizations, including educational, following journals: Academy of Management Jour- engineering, medical, research, social welfare, and nal, Journal of Banking and Finance, Journal of nonproﬁt advocacy organizations. During the past International Business Studies, Journal of Manage- three decades, he has centered his research and ment, Journal of Management Studies, and Orga- writing on the relation between organizations and nization Science, and other outlets. their institutional environments. In 2015, he was Open Access This article is licensed under a named ‘‘Eminent Scholar of the Year’’ by the Creative Commons Attribution 4.0 International Academy of International Business. License, which permits use, sharing, adaptation, distribution and reproduction in any medium or Vincent E. Kunst is a Lecturer of International format, as long as you give appropriate credit to the Business at the University of Liverpool. He earned original author(s) and the source, provide a link to his PhD at the University of Groningen and his the Creative Commons licence, and indicate if research focuses on how institutions and institu- changes were made. The images or other third party tional complexity inﬂuences international business material in this article are included in the article’s activities. Creative Commons licence, unless indicated other- wise in a credit line to the material. If material is Chei Hwee Chua is a Doctoral Candidate (ABD) in International Business at the Darla Moore School of not included in the article’s Creative Commons Business, University of South Carolina. Her licence and your intended use is not permitted by research topics include intercultural negotiation statutory regulation or exceeds the permitted use, and communication, institutional theory and sus- you will need to obtain permission directly from tainable adoption of organizational practices at the copyright holder. To view a copy of this licence, MNC subsidiaries, expatriate management, and visit http://creativecommons.org/licenses/by/4.0/. post-merger and acquisition integration manage- ment. She is currently serving as Communications Publisher’s Note Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Accepted by Eleanor Westney, Consulting Editor, 9 November 2019. This article has been with the authors for two revisions. Journal of International Business Studies

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The construct of institutional distance through the lens of different institutional perspectives: Review, analysis, and recommendations

The construct of institutional distance through the lens of different institutional perspectives: Review, analysis, and recommendations

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The construct of institutional distance through the lens of different institutional perspectives: Review, analysis, and recommendations

The construct of institutional distance through the lens of different institutional perspectives: Review, analysis, and recommendations

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