The asymmetric effect of institutional distance on international location: Family versus nonfamily firms

• Author: Virginia Hernández,María Jesús Nieto,Andrea Boellis
• Date: 01 February 2018
• DOI: http://doi.org/10.1002/gsj.1203
• Published date: 01 February 2018

SPECIAL ISSUE ARTICLE

The asymmetric effect of institutional distance on

international location: Family versus nonfamily

firms

Virginia Hernández

1

| María Jesús Nieto

1

| Andrea Boellis

2

1

Institute of Entrepreneurship and Family

Business, Universidad Carlos III de Madrid,

Getafe, Spain

2

Department of Management, Economics and

Industrial Engineering, Politecnico di Milano,

Milan, Italy

Correspondence

Virginia Hernández, Institute of Entrepreneurship

and Family Business, Universidad Carlos III de

Madrid, C/ Madrid, 126, 28903 Getafe (Madrid),

Spain.

Email: vhpaz@ing.uc3m.es

Funding information

Community of Madrid and European Social Fund,

Grant/Award number: CM S2015/HUM-3417-

INNCOMCON; Spanish Ministry of Economy and

Competitiveness, Grant/Award number: ECO2015-

67296-R

Research Summary: This study examines international

location choice by considering the potential effects of

institutional distance on the decision comparing family

and nonfamily firms. We argue that the magnitude and

direction of institutional distance matter and that institu-

tional distance has an asymmetric effect on location

choice. However, we argue that family involvement has a

moderating effect on this relationship because family

firms manage institutional distance differently than non-

family counterparts. Our results, using a sample of Italian

firms (2000–2013), reveal that firms are more likely to

choose locations for which the positive institutional dis-

tance is greater. Additionally, when compared to nonfam-

ily firms, family firms are more likely to choose locations

with greater negative institutional distance and less likely

to enter countries with greater positive institutional

distance.

Managerial Summary: Institutional distance between

countries is an important dimension firms take into

account when deciding the location of their foreign

investments. We show the importance of the magnitude

and direction of this distance in choosing the destination

country and the different impact that distance has for

family firms. Institutional distance has an asymmetric

effect on the international location choice. Specifically,

greater positive institutional distance makes firms more

likely to choose a location; on the contrary, greater nega-

tive institutional distance makes the location less attrac-

tive. Family firms, however, present some peculiarities

that fine-tune the effect of institutional distance on the

location decision. Thus, family firms are more (less)

likely to choose locations involving lower (higher) levels

Received: 30 January 2016 Revised: 20 June 2017 Accepted: 28 June 2017

DOI: 10.1002/gsj.1203

Copyright © 2017 Strategic Management Society

22 wileyonlinelibrary.com/journal/gsj Global Strategy Journal. 2018;8:22–45.

of institutional development than their home country

compared to nonfamily counterparts.

KEYWORDS

asymmetry of distance, family firms, family-managed

firms, institutional distance, international location

choice

1|INTRODUCTION

Traditionally, the choice of foreign direct investment (FDI) location has been explained by examin-

ing host country factors and the differences between home and host countries (Flores & Aguilera,

2007; Ma, Delios, & Lau, 2013; Majocchi & Strange, 2007). Specifically, the literature has found

institutional differences to be a significant factor when explaining location choice because it gener-

ates uncertainties and the liability of foreignness (Jiang, Holburn, & Beamish, 2014; Williams &

Grégoire, 2015).

Firms, however, may not face the same levels of uncertainty when entering countries for which

the institutional difference is of the same magnitude but has a different direction (Håkanson &

Ambos, 2010). On the contrary, the institutional distance may have an asymmetric effect on firm

decisions which will depend on the direction of the distance (Shenkar, 2001), and the exploration of

these asymmetric effects should be completed (Hutzschenreuter, Kleindienst, & Lange, 2016). Addi-

tionally, the way country-level factors affect location decisions is far from being fully explained, as

firm characteristics may alter it, and organizational and managerial aspects have been considered

only in recent studies (Duanmu, 2012; Lei & Chen, 2011; Lien & Filatotchev, 2015; Ramasamy,

Yeung, & Laforet, 2012). One of these organizational aspects is related to the firm ownership struc-

ture. Ownership structure matters with respect to FDI location decisions and, in particular, family

insider shareholders influence the choice of location (Strange, Filatotchev, Lien, & Piesse, 2009).

Therefore, we posit two research questions in this article. First, we wonder whether institutional dis-

tance may have an asymmetric effect on firms’location decisions and how this effect varies depend-

ing on the direction of the distance. Second, we consider the possibility that this asymmetric effect

may depend on a firm-level characteristic, such as family involvement.

In order to answer the first research question, we focus on examining the differences between

the institutional quality of the home and host countries, which we will refer to as the institutional

distance (Tomio & Amal, 2015). Previous research has explained the effect of cultural distance

(Gomez-Mejia & Palich, 1997; Tihanyi, Griffith, & Russell, 2005), but there are few that have con-

sidered other institutional factors, such as the differences between the quality of governance in the

home and host countries. The direction of the distance for this factor is especially important, as

firms may not only face differences, as in the case of cultural distance, but may encounter higher or

lower levels of development of governance when compared to their home country. According to

recent literature, greater institutional distance does not always constitute a disadvantage, as both the

magnitude and direction of the distance have to be taken into account (Cuervo-Cazurra & Genc,

2011; Zaheer, Schomaker, & Nachum, 2012). Although some research has examined the asymmetric

effect of distance on certain international decisions, we know less about how institutional distance

HERNÁNDEZ ET AL.23