Does imitation reduce the liability of foreignness? Linking distance, isomorphism, and performance
| Author | Robert Salomon,Zheying Wu |
| Published date | 01 December 2016 |
| Date | 01 December 2016 |
| DOI | http://doi.org/10.1002/smj.2462 |
Strategic Management Journal
Strat. Mgmt. J.,37: 2441–2462 (2016)
Published online EarlyView 4 February 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2462
Received 22 April 2013;Final revision received3 September 2015
DOES IMITATION REDUCE THE LIABILITY
OF FOREIGNNESS? LINKING DISTANCE,
ISOMORPHISM, AND PERFORMANCE
ZHEYING WU1and ROBERT SALOMON2*
1Department of Business Administration, School of Management, Fudan University,
Shanghai, China
2Department of Management and Organizations, Stern School of Business, New
York University, New York, New York, U.S.A.
Research summary: Research demonstrates that foreign rms from institutionally distant coun-
tries imitate the practices of domestic rms (i.e., adopt an isomorphism strategy). The conjecture
has been that pursuing such a strategy can help foreign rms counteract the deleterious perfor-
mance consequences associated with institutional distance; yet there is scant evidence of such.
This study treats isomorphism as an endogenously selected strategy inuenced by institutional
distance to examine its performance consequences. Using a dataset of 80 foreign banks from 25
countries operating in the United States, we nd that foreignrms from institutionally distant home
countries benet initially from selecting an isomorphism strategy. However, the benets diminish
with experience.
Managerial summary: Multinational companies experience great difculty in managing institu-
tional distance, and research suggests that one way to overcome distance-related constraints is
to imitate the strategies of local companies. Unfortunately, we do not know enough about the
performance-related consequences of engaging in such imitative behavior. This study examines
whether imitating local rms improves performance for multinational companies frominstitution-
ally distant markets. We nd that imitation improves a rm’s performance at rst; however, with
experience those same strategies result in performance decrements. Managers of multinationals
should therefore be careful not to get locked into imitative strategies that provide performance
benets upon entry, but that fail to provide benets over time. Copyright © 2015 John Wiley &
Sons, Ltd.
INTRODUCTION
Firms expand abroad for a variety of reasons,
which typically include prot and/or efciency
considerations (Dunning, 1993). Expansion permits
rms to gain access to foreign demand, to reduce
operating costs through lower-cost labor and/or
reliable sources of supply, to learn (Almeida, 1996),
to respond to competitor moves (Alcacer, 2006),
Keywords: isomorphism; institutional distance; liability of
foreignness; foreign subsidiary performance; endogeneity
*Correspondence to: Robert Salomon, 40 West 4th Street,
Suite 711, New York, NY, 10012. E-mail: rsalomon@stern.
nyu.edu
Copyright © 2015 John Wiley & Sons, Ltd.
to improve operational exibility (Kogut, 1988), to
diversify away country-specic risk (e.g., Lu and
Beamish, 2004), and/or to gain tax benets (Hines,
1996). Additional motivations relate less directly to
pecuniary outcomes, such as the pursuit of political
agendas, as with state-owned enterprises (see
Cuervo-Cazurra et al., 2014) and/or expansion for
private managerial gain (e.g., Morck and Yeung,
1991).
Irrespective of the precise motivation, studies
demonstrate that foreign rms are at a disad-
vantage vis-à-vis indigenous competitors (Hymer,
1960). These disadvantages arise out of differences
between the host and home countries. Because
2442 Z. Wu and R. Salomon
foreign rms originate from countries that differ,
often markedly, from the host country, they are at an
informational disadvantage, are subject to local dis-
crimination, and incur greater operation and coor-
dination costs. As a result, foreign rms typically
underperform relative to domestic competitors. The
literature has described this effect as a “liability of
foreignness” (Zaheer, 1995).
One powerful means by which rms can offset
the liability of foreignness is to expand abroad from
a position of domestic strength, leveraging intan-
gible assets and exploiting differences between
the home and host countries (Ghemawat, 2007).
Intangibles can help (Morck and Yeung, 1991),
but they often do not fully offset the liability of
foreignness; myriad studies demonstrate that, even
when exploiting intangibles, foreign rms continue
to underperform (e.g., Zaheer, 1995; Zaheer and
Mosakowski, 1997).
Recently, scholars have argued that rms can
adopt other strategies to mitigate the liability of
foreignness. For example, foreign rms can man-
age the liability of foreignness by selecting entry
modes that minimize the effects of institutional
distance (e.g., Delios and Henisz, 2000; Martin and
Salomon, 2003). They can also turn to a variety
of post-entry operational strategies (Bartlett and
Ghoshal, 1989).
One such option is to imitate local, domestic
competitors— a strategy referred to as local iso-
morphism (Zaheer, 1995). Organizational scholars
suggest that rms are more likely to adopt isomor-
phic strategies in situations characterized by uncer-
tainty and information asymmetry (e.g., DiMag-
gio and Powell, 1983). Extending those ideas to
an international setting, Salomon and Wu (2012)
demonstrate that foreign rms at a greater infor-
mational disadvantage— from more institutionally
distant home countries— tend to rely more on local
isomorphism strategies. They surmise that rms
from distant countries opt for isomorphism in an
effort to mitigate the liability of foreignness.
Although research suggests that isomorphism
ought to help foreign rms from institutionally
distant countries mitigate the liability of foreign-
ness, we still do not fully understand whether, or
how, isomorphic strategies translate into concrete
performance benets. Past studies have linked
isomorphism to performance in domestic (e.g.,
Deephouse, 1999; Sirmon and Hitt, 2009) and
international settings (e.g., Miller and Eden, 2006;
Zaheer, 1995). However, few studies (international
or domestic) consider the performance con-
sequences associated with isomorphism as an
endogenously determined strategy.
Scholars who study the antecedents of isomor-
phism recognize, either explicitly or implicitly,
that isomorphism can be endogenous. Theory
suggests that managers can exercise discretion
as to why, when, and how to adopt isomorphism
(Oliver, 1991, 1997). Empirically, researchers
model isomorphism as an endogenous outcome
variable, implying that managers anticipate its
performance effects (see Shaver, 1998).
Studies increasingly address the performance
consequences of endogenously selected strategies
(see Shaver,1998; Sirmon and Hitt, 2009); however,
to our knowledge, researchers have not extended
this approach to the link between isomorphism and
foreign subsidiary performance. We therefore adopt
an empirical strategy that allows for isomorphism
as an endogenous and strategic response to dis-
tance, with performance implications. In this way
we contribute to a body of research at the conuence
of institutional theory and international strategy,
extending work that demonstrates a link between
distance and isomorphism (e.g., Rosenzweig and
Nohria, 1994; Salomon and Wu, 2012). Further-
more, we take the next logical step: connecting dis-
tance to performance through isomorphism, as an
endogenous mediating variable. Weargue that rms
that make decisions regarding local isomorphism
based on their institutional distance prole perform
better than those that do not.
In addition to testing this direct mediating
link between distance, isomorphism, and perfor-
mance, we also examine limits to the performance
benets associated with isomorphism. We argue
that experience is likely to moderate the impact of
isomorphism on performance, such that the greatest
benets to isomorphism are likely to accrue to
inexperienced rms from institutionally distant
markets. As foreign rms from distant markets
gain legitimacy and a level of comfort operating in
the local market, isomorphism is likely to provide
fewer benets.
We test our theory using a dataset of 170 for-
eign bank subsidiaries established by 80 foreign
banks from 25 countries operating in the United
States between 1978 and 2006. We measure local
isomorphism as the similarity in practices between
foreign and domestic banks. We then compare
the performance of foreign bank subsidiaries that
opt for isomorphism to the performance of those
Copyright © 2015 John Wiley & Sons, Ltd. Strat. Mgmt. J.,37: 2441–2462 (2016)
DOI: 10.1002/smj
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