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Strong alien or weak acquaintance? The effect of perceived institutional distance and cross-national uncertainty on ownership level in foreign acquisitions

Fatemeh Askarzadeh (Department of Management, Old Dominion University, Norfolk, Virginia, USA)
Hamed Yousefi (Department of Finance, Old Dominion University, Norfolk, Virginia, USA)
Mahdi Forghani Bajestani (Department of Management, Old Dominion University, Norfolk, Virginia, USA)

Review of International Business and Strategy

ISSN: 2059-6014

Article publication date: 7 December 2020

Issue publication date: 17 May 2021

164

Abstract

Purpose

Focusing on the direction of foreign acquisition, this study aims to differentiate the effect of institutional distance on the level of ownership. The authors identify several theoretical and methodological issues that might account for the inconsistencies in the literature and provide remedies accordingly. Specifically, the authors propose perceived institutional distance as a conceptualization of distance that controls for asymmetric uncertainty.

Design/methodology/approach

The authors test the framework with ordinary least squares regression for a sample of 14,192 firm-entries in 115 target countries over 2007–2017.

Findings

The authors find that institutional distance shows a negative effect on equity ownership in all-inclusive global samples, while there are two imbalanced opposite effects if direction is considered. This casts doubt on the validity of studies that ignore direction. The authors suggest that multinational enterprises entering countries with lower-quality institutions tend to perceive more pronounced distance effects than those expanding the other way around. Hence, the authors argue that “perceived institutional distance” better explains the functional role of distance than simple distance.

Practical implications

This study better delineates the link between distance and uncertainty and enhances managerial insights for entry mode selection. For policy-making purposes, the authors also show that improvement in institutional quality has a different effect on foreign resource commitment in developed and developing countries.

Originality/value

To the best of authors’ knowledge, this is the first study that considers both directionality and imbalance in institutional distance and proposes a measure to control for non-linear asymmetric relationship between distance and ownership. The authors extend the institutional theory and show the superiority of perceived institutional distance in predicting ownership implications.

Keywords

Citation

Askarzadeh, F., Yousefi, H. and Forghani Bajestani, M. (2021), "Strong alien or weak acquaintance? The effect of perceived institutional distance and cross-national uncertainty on ownership level in foreign acquisitions", Review of International Business and Strategy, Vol. 31 No. 2, pp. 177-195. https://doi.org/10.1108/RIBS-04-2020-0047

Publisher

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Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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