Understanding When MNCs can Overcome Institutional Distance: A Research Agenda.

Author:Fortwengel, Johann
 
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1 Introduction

How can we account for the puzzling phenomenon that Multinational corporations (MNCs) appear, under certain conditions, to be able to behave in ways deviating from standard practice in host countries? Most existing research in international business (IB) emphasizes the importance of institutional distance between a country pair (Kostova and Zaheer 1999) in largely prescribing behavior (Henisz and Swaminathan 2008). For example, Xu and Shenkar (2002, p. 614) maintain that "firms will refrain from investing in markets that are institutionally distant, because business activities in those markets require conformity to institutional rules and norms that conflict with those of the home country". Meanwhile, empirical studies describe how MNCs engage with host institutions in order to transfer foreign practices (Fortwengel and Jackson 2016), introduce new technologies and products (Regner and Edman 2014), or leverage capabilities (Carney et al. 2016), in the process deviating from dominant behavioral patterns in host settings. These empirical observations are still largely unexplained in a theoretical sense (Shepherd and Suddaby 2017), meaning that we have an underdeveloped understanding of when distance is constraining, and when it allows for digression.

It is widely observed that firms usually conform "to the norms and regulations imposed by the external environment" (Bitektine 2011, p. 158). However, the large and growing body of literature on organizational deviance, defined as "intentional behaviors that significantly depart from the norms of a referent group" (Spreitzer and Sonenshein 2004, p. 841), (1) shows that firms may choose not to conform to existing norms and regulations. MNCs are uniquely positioned to engage in behavior deviating from standard practice in host settings. For one, this is because MNCs span multiple countries (Roth and Kostova 2003), and thus are aware of different approaches to solving common coordination problems, such as those related to corporate governance (Aguilera and Jackson 2003). Their multiple embeddedness (Meyer et al. 2011) provides them with a multitude of templates or scripts to follow. Furthermore, it has been suggested that their organizational identity as foreign and as a 'minority' enables experimentation (Edman 2016). Similarly, an increasing number of studies examines how exactly MNCs engage with foreign environments. For example, Regner and Edman (2014) describe how Pharmacia introduced its anti-smoking product Nicorette to the US market. They show how this involved Pharmacia actively engaging with preexisting norms and cognitions, even including co-writing the rules and regulations of the Food and Drug Administration (FDA). In the process, Nicorette was successfully positioned as a legitimate product. Through these and similar activities related to institutional work, involving attempts to create, maintain, or disrupt institutions (Lawrence et al. 2009), MNCs actively engage with host settings.

As such, IB research has developed a good understanding of why MNCs are in a position to envision and implement deviating behavior (Kostova et al. 2008), related to their minority position and multiple embeddedness, and how they engage in activities targeting the host environment in this process (McGaughey et al. 2016), through activities related to institutional work and entrepreneurship. What is less well understood, however, is when exactly the favorable position of being embedded in various country contexts simultaneously actually translates into behavior successfully deviating from dominant patterns in a particular host setting.

Leveraging the growing interest in understanding better when organizations may not conform to institutional norms, rules, and values (Aguilera et al. 2016), this paper draws on facets of the comparative capitalisms (CC) literature to map out a research agenda to examine conditions influencing the ability of MNCs to overcome institutional distance. Overcoming institutional distance is defined here as the ability to engage in behavior deviating from the standard in a particular host setting. This differs from alternative conceptualizations framing the mere non-exit of a foreign subsidiary as overcoming institutional distance (Kang et al. 2017), or the argument that adapting to local patterns of behavior may be another appropriate strategy to deal with distance. However, overcoming distance as involving deviating behavior, that is, adopting practices "that fall outside the zone of conformity" (Aguilera et al. 2016, p. 17) in a particular host environment, can be very important because it enables firms to replicate their competitive advantages or operate effectively across borders (Kogut and Zander 1992), which frequently involves the transfer of knowledge and practices from home to host country. Drawing on insights from CC literature (Hall and Soskice 2001; Whitley 1999), which explores how institutions shape firm behavior and organizational strategies and practices but recently has developed greater appreciation for agentic and deviant behavior (Aguilera et al. 2016; Becker-Ritterspach et al. 2017; Morgan 2011), this paper aims to contribute to a mapping of the conditions that enable MNCs to overcome distance by addressing the following theoretical puzzle: When are MNCs enabled to engage in deviant behavior in institutionally distant settings?

Overcoming distance and behaving in ways different from those typical of a particular host country is not always sought, to be sure. For example, MNCs frequently engage in tactics of institutional arbitrage (Witt and Lewin 2007) or segmentation (Edwards et al. 2013), meaning that foreign operations are strategically located in settings offering particular competitive advantages, such as low labor costs. Acknowledging this important observation, which forms a critical boundary condition of the arguments developed here, this paper is concerned with the multitude of cases where MNCs indeed attempt to overcome institutional differences for purposes of global integration and the replication of key capabilities. This paper thus focuses on an important sub set of MNC strategies, which relates to concepts such as institutional innovation (Regner and Edman 2014), acting as 'organization-creating organization' (Westney 1987), or responding by manipulating (Oliver 1991).

To map out a research agenda, this paper builds on CC research to offer a configurational framework of institutional distance as a defining feature of the institutional context conditions affecting MNC behavior, involving four key dimensions: coordination, strength, thickness, and resources. With its focus on particular context conditions as well as its appreciation for potentially complex causal as opposed to linear effects, the literature on CC offers a unique angle to explore what conditions enable MNCs to overcome distance. Building on recent advances in configurational approaches (Haxhi and Aguilera 2017; Misangyi et al. 2017), one central argument developed in this paper is that different cases of configurations will make overcoming institutional distance more or less likely.

The paper makes several contributions to existing literature. First, it advances our understanding of agency in and by MNCs by offering the concept of overcoming institutional distance as involving behavior deviating from standard practice in a particular foreign setting. This adds an important conceptual idea to the repertoire of IB scholars trying to make sense of the relationship between institutions and MNCs. Second, by mapping institutional distance as involving four critical dimensions, this paper provides a more contextualized notion of institutional distance, going beyond purely relational aggregate measures. Finally, by focusing on the bundles of conditions and their complex effects on the ability to overcome institutional distance, this paper charts new territory for studying MNC responses to institutional distance. More broadly, the paper contributes to the literature by shifting attention away from the firms as (possible) agents (Kostova et al. 2008) and their activities (Regner and Edman 2014) to focus instead on the institutional context conditions and their complex effects on enabling or constraining MNCs as collective actors. This promises to push the boundaries of our understanding of when and why institutional distance constrains firms, and when and why it allows for digression. Because MNCs are uniquely positioned to engage in deviant behavior and may trigger and drive institutional dynamics in the process, the arguments developed in this paper may have some important implications for the broader organization studies and comparative management literature on institutional stability and change (Dorrenbacher and Geppert 2017; Hotho and Saka-Helmhout 2017; Saka-Helmhout et al. 2016).

2 Institutional Distance as a Multi-dimensional Concept

Institutional distance is a key concept in IB research (Berry et al. 2010; van Hoorn and Maseland 2016)--after all, "international management is management of distance" (Zacheer et al. 2012, p. 19; emphasis in original). What is more, recent research shows that distance is not decreasing (Beugelsdijk et al. 2015), despite increasing levels of socio-cultural and business exchange between countries, suggesting that distance will continue to be an important part of the challenge of managing MNCs in their constant grapple with the lack of external fit in a host environment (Fortwengel 2017). In recent years, scholars have moved beyond aggregate and singular concepts of distance and come to appreciate the complexities involved in institutional environments as multi-dimensional (Berry et al. 2010; Ferner et al. 2012; Jackson and Deeg 2008; Kang et al. 2017). Meanwhile, research on these multi-dimensional concepts and constructs often relies on classic regression analyses in order to determine the...

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