Formal and Informal Institutional Differences Between Home and Host Country and Location Choice: Evidence from the Spanish Hotel Industry.
| Verfasser | Romero-Martinez, Ana M. |
| Posten | RESEARCH ARTICLE - Report |
1 Introduction
International business (IB) research on foreign location choice is focused on the reasons why firms select particular host countries (Chidlow et al. 2009, 2015; Goerzen et al. 2013; Kim and Aguilera 2016; Rugman and Verbeke 2009). Location choice plays a key role in the process of internationalization, since it is the first decision firms make in the pre-investment stage. Therefore, it will condition the rest of the process and performance of internationalization (Beugelsdijk et al. 2018). However, location choice has not received as much attention as other international pre- and post- investment decisions, and empirical results are far from conclusive. Therefore, this topic has recently burgeoned and authors appeal for more evidence (Hitt et al. 2016; Nielsen et al. 2017).
According to Nielsen et al. (2017), the main factors explaining foreign location choice are grouped into three different levels and theoretical frameworks, with blurring borders between them: Host country context characteristics--based on economic theory (Krugman 1991; Vernon 1966), parent firm's resources and capabilities--from the resource-based view (Barney 1991; Grant 1991), and home-host country differences--based on institutional theory (North 1990; Scott 1995).
Institutional differences may create an entry barrier to firms into foreign countries because they affect the capacity of a company to interact or collaborate with the players in foreign markets and adapt to local conditions (Li et al. 2016), as well as to get better performance in the host country (Beugelsdijk et al. 2018). Since international success depends essentially on managing home and host country institutional differences or distance (Kostova 1999; Zaheer et al. 2012), in this paper we adopt an institutional perspective. The institutional theory is considered a powerful framework for studying firms' international behavior and performance (Nielsen et al. 2017). This theoretical approach better explains location choice, since it integrates both the economic view towards country opportunities and the behavioral one based on firms' strengths, that have traditionally evolved separately (Buckley et al. 2007; Makino et al. 2002).
Institutional theory defines international institutional contexts as the "rules of the game in a society" where firms develop their international activities (North 1990, p. 3). This perspective highlights the importance of formal (North 1990) and informal (Scott 1995) country-level institutions that shape international conduct (Child and Marinova 2014; Peng and Khoury 2009) and MNE performance (Hutzschenreuter and Voll 2008; Xu and Shenkar 2002).
The lack of literature on location choice can be observed from an institutional differences point of view too (Harzing and Pudelko 2016; Hitt et al. 2016; Kostova 1999). With some exceptions like Ojala and Tyrvainen (2007) and Holmes et al. (2013), researchers have mainly focused on the effect of institutional differences on foreign direct investment (FDI) decisions like the ownership structure of acquisitions (Demirbag et al. 2007; Elango et al. 2013; Xu et al. 2004) or greenfield versus acquisitions (Dikova et al. 2010; Estrin et al. 2009; Hernandez and Nieto 2015).
Moreover, the theoretical and empirical literature has handled the institutional construct in a heterogeneous manner (Harzing and Pudelko 2016). Some studies have only analyzed specific formal institutional variables, such as the corruption level (Godinez and Liu 2015), tax rates (Nielsen et al. 2017) or labor market regulations (Arregle et al. 2013). In addition, cultural differences between countries were the only informal dimensions analyzed by most scholars (Zaheer et al. 2012), according to Hofstede's dimensions (1980, 2001). In comparison to the traditional and perceptual view of cultural differences, other authors have included informal institutional factors in a wider sense, which better capture the multidimensional character of informal differences (Contractor et al. 2014; Hitt et al. 2016; Xu and Shenkar 2002). Furthermore, existing literature suggests that it is necessary to use more objective measures of culture to capture the phenomenon without the particular perception of the respondent, since that may cause the divergent results observed in previous research (Beugelsdijk et al. 2018).
Regardless of the formal or informal nature of the institutional context analyzed, a partial look at institutional differences between countries may lead to biased results and wrong conclusions, with respect to foreign location choice (Nielsen et al. 2017). Moreover, some recent works show that informal institutional differences play a relevant role on location choice, but only when formal institutional factors suggest that a location is attractive (Beugelsdijk et al. 2018). From this basic assumption, we consider that institutional differences and foreign location choice must be studied, including both formal and informal institutions and the interplay between them, as the Uppsala School proposed through the psychic distance construct (Avloniti and Filippaios 2014; Johanson and Vahlne 1977).
Formal institutions include regulative, political and economic factors, which impact on country choice location, and which should be studied (Arregle et al. 2013; Xu and Shenkar 2002). The greater the distance of the formal institutional context of the host country, the greater the problems companies will face (Li et al. 2016). The firm will be less autonomous to make decisions and will depend strongly on discretionary behaviors of local governments (Schwens et al. 2011).
Informal institutions contain cognitive and normative factors. Since informal factors have been mostly studied only through culture (Morschett et al. 2010), other authors appeal for more research comprising complementary and objective factors like geographic distance and linguistic differences (Berry et al. 2010; Ghemawat 2001; Harzing and Pudelko 2016). Geographical distance is the physical separation between one location and another, typically involving the space between the home of a firm and its foreign location (Ojala 2015). This distance limits accessing and interpreting soft information from the host country (Chakrabarti and Mitchell 2016). Furthermore, spatial closeness lets agents build stronger relationships based on trust (Lei and Huang 2014). Linguistic differences can be defined as the syntactic difference between the official languages spoken in two countries (Cuypers et al. 2015; Grimes 1992). These differences make communication harder and causes misunderstanding among players (Ambos and Ambos 2009). However syntactic differences are not only a matter of communication, since language is heavily linked to cultural values too. Sharing a common language involves similar thinking structures and identity (Schomaker and Zaheer 2014). As some authors suggested (Beugelsdijk et al. 2018), language differences entail a more objective way to observe and measure cultural distance.
Foreign location choice is particularly determined by the differences of formal and informal institutions in service industries, since operations and distribution are simultaneous and demand presence in the host country (Pla-Barber and Ghauri 2012). Moreover, the hospitality industry is a good example of this as hotel chains are forced to take on resource-intensive activities in host countries as well as interactions with society and policy makers there are rather crucial. In short, the higher the formal and informal institutional differences between home and host country, the harder the socio-political networking in the host country.
The Spanish hotel industry can be considered a reference point in the global market as it is involved in an intensive internationalization process (Gemar et al. 2016). Even though the main Spanish hotel chains carry on commercial activities in foreign markets (Hosteltur 2016a), there seem to be a lack of studies analyzing the internationalization of this sector. This is rather surprising because the Spanish economy (a) greatly depends on the tourism industry, which represents 11% of the GDP and (b) it is service-driven as almost 75% of the GDP comes from the service sector (NSI 2016; UNWTO 2016).
To obtain a better understanding about home-host formal and informal institutional differences and their effect on location choice, we study their relationships with the population of internationalized Spanish hotel chains. Specifically, we propose the following two research questions: First, do differences in formal and informal (i.e. geographic distance and linguistic differences) institutional factors affect foreign location choice? Second, do the geographic distance and linguistic differences moderate the relationship between formal institutional differences and foreign location choice?
Our results confirm the expected negative individual effect of formal institutional and linguistic differences on foreign location choice. Nevertheless, we did not find support for any effect, either an individual or a moderating one, for the geographic distance. Finally, the moderating role of linguistic differences was surprisingly contrary to our expectations. As in a context of high linguistic differences, the more formal the institutional differences, the higher the Spanish presence in a particular foreign location.
Our contributions are as follow. Firstly, by incorporating the literature on institutional theory we extend the existing IB field with regards to location choice decisions in the service industry (Beugelsdijk et al. 2018; Harzing and Pudelko 2016; Werner 2002). Secondly, by including jointly both formal and informal dimensions and the interplay between them (as suggested by Beugelsdijk et al. 2018; Dow and Karunaratna 2006; Dow and Larimo 2011; Harzing and Pudelko 2016) we improve the analysis of institutional factors from the point of a location choice...
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