St. Petersburg University
Graduate School of Management
Master in Management Program
THE INFLUENCE OF INSTITUTIONAL DISTANCE ON OWNERSHIP STRATEGIES
OF RUSSIAN COMPANIES IN THE PROCESS OF INTERNATIONALIZATION
Master’s Thesis by the 2nd year student
Concentration — Master in International Business
Anna Kalioshko
Research advisor:
Ph. D., Professor, Andrey Panibratov
St. Petersburg
2016
АННОТАЦИЯ
Автор
Название магистерской диссертации
Калиошко Анна Андреевна
Влияние институциональной дистанции на
стратегии собственности российских
компаний в процессе интернационализации
Факультет
Направление подготовки
Год
Научный руководитель
Описание цели, задач и основных
результатов
Высшая Школа Менеджмента
Международный бизнес
2016
Андрей Юрьевич Панибратов
Цель исследования: установить, каким
образом институциональные различия
влияют на стратегии собственности
российских компаний в процессе
интернационализации
Задачи исследования:
• Проанализировать формы и
направления влияния
институциональных различий на
стратегии собственности компаний;
• Сформировать совокупность
переменных для измерения
регулятивной, когнитивной и
нормативной дистанции между
страной происхождения и страной
целевого рынка компании;
• Выявить различия в
институциональных факторах,
влияющих на стратегии
собственности российских компаний
в развитых и развивающихся странах.
Результаты исследования:
• различия между показателями
экономической свободы и
политической стабильности между
Россией и страной целевого рынка
влияет на стратегии собственности
российских компаний, если страна
назначения - развитая; дистанция в
введении бизнеса имеет значение,
если российской компания выходит
на развивающийся рынок;
• членство в одних и тех же
международных организациях России
и страны целевого рынка влияет на
стратегии собственности российских
компаний и в развитых, и в
развивающихся странах;
• различия между показателями уровня
коррупции не оказывает влияния на
стратегии собственности российских
2
•
Ключевые слова
компаний и в развитых, и в
развивающихся странах;
размер русской диаспоры в развитой
стране целевого рынка компании и
нормативная дистанция с данной
страной имеет отрицательную
зависимость с долей собственности
российской компании.
Институциональные различия, стратегия
собственности, компании из развивающихся
стран
ABSTRACT
Kalioshko Anna Andreyevna
The influence of institutional distance on
ownership strategies of Russian companies in
the process of internationalization
Faculty
Graduate School of Management
Main field of study
International Business
Year
2016
Academic Advisor's Name
Panibratov Andrei Yurievich
Description of the goal, tasks and main results The goal of the research: to investigate how
institutional distance influences ownership
strategies of Russian companies in the process
of their internationalization
Tasks of the research:
• analyze types and direction of influence
of institutional distance on ownership
strategies;
• identify set of variables for measuring
regulatory, normative and cognitive
distance between home and host market;
• find out differences in factors that
influence ownership-related decisions of
Russian companies in developed and
emerging economies.
The main results:
• distance in Economic Freedom and
Political stability between Russian and
host market has influence on ownership
strategies of Russian firms in case if the
market is developed, while distance in
Doing business matters when Russian
firm enter emerging market;
• membership in the same international
organizations of Russia and a target
country has major impact on ownership
strategies of Russian firms, both in
Master Student's Name
Master Thesis Title
3
emerging and developed market;
distance in the level of corruption has no
impact on ownership strategies of
Russian firms, either in developed, or
emerging countries;
• size of Russian diaspora in host
developed market and cultural distance
are negatively correlated with ownership
stake of Russian firms.
Institutional distance, ownership strategy,
emerging-market firms
•
Keywords
4
ЗАЯВЛЕНИЕ О САМОСТОЯТЕЛЬНОМ ХАРАКТЕРЕ ВЫПОЛНЕНИЯ
ВЫПУСКНОЙ КВАЛИФИКАЦИОННОЙ РАБОТЫ
Я, Калиошко Анна Андреевна, студент второго курса магистратуры направления
«Менеджмент», заявляю, что в моей магистерской диссертации на тему «Влияние
институциональной дистанции на стратегии собственности российсских компаний в
процессе интернационализации», представленной в службу обеспечения программ
магистратуры для последующей передачи в государственную аттестационную комиссию
для публичной защиты, не содержится элементов плагиата.
Все прямые заимствования из печатных и электронных источников, а также из
защищенных ранее выпускных квалификационных работ, кандидатских и докторских
диссертаций имеют соответствующие ссылки.
Мне известно содержание п. 9.7.1 Правил обучения по основным образовательным
программам высшего и среднего профессионального образования в СПбГУ о том, что
«ВКР выполняется индивидуально каждым студентом под руководством назначенного
ему научного руководителя», и п. 51 Устава федерального государственного бюджетного
образовательного
учреждения
высшего
образования
«Санкт-Петербургский
государственный университет» о том, что «студент подлежит отчислению из СанктПетербургского
университета
за
представление
курсовой
или
выпускной
квалификационной работы, выполненной другим лицом (лицами)».
(Подпись студента)
26.05.2016
(Дата)
STATEMENT ABOUT THE INDEPENDENT CHARACTER OF
THE MASTER THESIS
I, Kalioshko Anna, second year master student, program «Management», state that my
master thesis on the topic «The influence of institutional distance on ownership strategies of
Russian companies in the process of internationalization», which is presented to the Master
Office to be submitted to the Official Defense Committee for the public defense, does not
contain any elements of plagiarism.
All direct borrowings from printed and electronic sources, as well as from master theses,
PhD and doctorate theses which were defended earlier, have appropriate references.
I am aware that according to paragraph 9.7.1. of Guidelines for instruction in major
curriculum programs of higher and secondary professional education at St.Petersburg University
«A master thesis must be completed by each of the degree candidates individually under the
supervision of his or her advisor», and according to paragraph 51 of Charter of the Federal State
Institution of Higher Education Saint-Petersburg State University «a student can be expelled
from St.Petersburg University for submitting of the course or graduation qualification work
developed by other person (persons)».
(Подпись студента)
26.05.2016
(Дата)
5
Table of Contents
Introduction .................................................................................................................................... 7
1 Literature review.......................................................................................................................... 9
1.1 Internationalization theories ..................................................................................................... 9
1.1.1 Internalization theory .................................................................................................................................................. 9
1.1.2 Transaction Cost Theory ............................................................................................................................................ 9
1.1.3 Eclectic paradigm, or OLI framework ................................................................................................................... 9
1.1.4 Uppsala theory of internalization ......................................................................................................................... 10
1.1.5 Resource-based-view (RBV) theory .................................................................................................................... 10
1.1.6 Liability of foreignness .............................................................................................................................................. 11
1.1.7 Institutional theory ..................................................................................................................................................... 14
1.1.8 Institutional distance ................................................................................................................................................. 15
1.1.9 Institutional distance and ownership strategies ............................................................................................ 17
1.1.10 Institutional distance in Emerging and Developed markets .................................................................. 20
1.2 Hypothesis Development ........................................................................................................ 22
1.2.1 Regulative distance ..................................................................................................................................................... 25
1.2.2 Cognitive distance ....................................................................................................................................................... 33
1.2.3 Normative distance ..................................................................................................................................................... 36
1.2.4 Control factors ............................................................................................................................................................... 38
2 Methodology .............................................................................................................................. 40
2.1 Sample .................................................................................................................................... 40
2.2 Model and measures ............................................................................................................... 41
2.2.1 Models ............................................................................................................................................................................... 41
2.2.2 Dependent variables ................................................................................................................................................... 42
2.2.3 Independent variables ............................................................................................................................................... 42
2.2.4 Control variables .......................................................................................................................................................... 45
3 Empirical results ........................................................................................................................ 47
Discussion ..................................................................................................................................... 56
Managerial relevance .................................................................................................................... 59
Conclusion .................................................................................................................................... 59
List of references .......................................................................................................................... 61
Appendix 1 Extract from research dataset .................................................................................... 72
6
Introduction
This paper contributes to the research on institution-based view of internationalization
determined by the distance in home and host country development. We examine the differential
effects of regulative, cognitive and normative distance on ownership strategies of Russian firms.
Traditionally, all papers on outward investment have been predominantly focused on
internationalization strategies of firms from developed markets (Hoskisson et al., 2000).
However, as EMFs are more and more actively engaging in worldwide investment, they are
attracting much attention of scholars. Although significant number of studies are devoted to
motivations of EMFs and volume of investments (e.g. number of M&A, amount of investments),
little attention is paid to ownership strategies of emerging market firms, such as modes of entry
and ownership stake in foreign subsidiary (Yang & Hyland, 2012). This paper focuses on such
under-studied strategic decision as level of ownership participation in cross-border corporate
deals of Russian companies.
Ownership participation of a company in international corporate deal is a critical strategic
decision which determines firm’ success and survival. A poor choice of ownership strategy often
results in mismatch in resource commitment between target and acquiring firms and incompetent
integration (Lahiri et al, 2012). Prior literature on corporate deals of emerging firms has largely
been focused exclusively on M&A (Yang, 2015; Panibratov et al, 2015) or choice between
partial or full acquisition (Brouthers & Hennart, 2007). Studies on institutional determinants and
ownership strategies of internationalizing companies have demonstrated significant relationship
(Contractor, et al., 2014; Tihanyi et al., 2005).
Research problem, objectives and delimitation
This paper is aimed to fill the gap in theoretical and applied knowledge on impact of
differences in home-host country institutional environment on ownership strategies of Russian
firms as well as to identify whether institutional factors that influence ownership strategies of
Russian firms in developed and emerging countries differ. After an extensive literature review
across leading academic journals, we can conclude that this paper is the first quantitive research
that is focused on the influence of institutional distance on ownership strategies of EMFs within
Russian context. The study expands research on emerging economies testing and adapting
variables that influence ownership strategies of EMFs.
The research questions are stated as follows:
•
What factors influence ownership-related decisions of Russian firms in the
process of internationalization?
•
To which extent do the factors that influence ownership strategies of Russian
firms in developed and emerging countries differ?
7
This research has a goal to investigate how institutional distance influences ownership
strategies of Russian companies in the process of their internationalization. The main tasks of
this paper are the following:
•
Analyze types and direction of influence of institutional distance on ownership strategies;
•
Identify set of variables for measuring regulatory, normative and cognitive distance
between home and host market;
•
Find out differences in factors that influence ownership-related decisions of Russian
companies in developed and emerging economies.
The subject of the study is the relation between institutional distance and ownership
strategies of Russian companies in the process of internationalization. The object of the study are
international corporate deals of Russian companies.
Research methodology and organization of the study
The research method of the paper is empirical study. The data on internalization patterns
of Russian company, in particular market entry methods, will be collected from such databases
as ZEPHYR Bureau van Dijk, Thomson Reuters, Marketline. Then the variables measuring LOF
drivers will be proposed. Statistical methods will be used (regression analysis, cluster analysis,
factor analysis) in order to test the main hypothesis of the study.
The study is organized in the following way. Firstly, the literature review on institutional
distance concept is presented with a particular focus on the influence of institutional distance on
ownership strategies. Then the research method is explained. After that the hypothesis are stated
and tested, the main conclusions are made. Finally, the main findings, scientific contribution of
the study, theoretical and managerial applications as well as the limitations are discussed.
8
1 LITERATURE REVIEW
1.1 Internationalization theories
1.1.1 Internalization theory
Internalization theory is a firm level theory. It determines the motive behind the firm’s
decision to establish its own production facilities instead of cooperation with local firms in
destination country. According to Hymer (1970), MNCs have to adapt to local environment in
each country and coordinate their activities across various subsidiaries around the world,
stimulating flows of information between them. A firm can maximize profits if it integrates
business activities in different «imperfect» markets. The optimum size of the form is where the
costs and benefits of further internalization equals the margin. This choice is defined by owners,
managers of enterprises and based on internal information flows between «internal markets» of
the enterprises. Two types of internalization re distinguished by Buckley and Casson (2009):
operational and knowledge internalization. The authors state that acquires are inclined to
internalize intangible assets of the target in case of overseas acquisitions.
1.1.2 Transaction Cost Theory
Transaction Cost Theory is based on two main assumptions: bounded rationality of
economic agents and likelihood of opportunistic behavior of economic agents (Williamson,
1981). Due to uncertainty and complexity of world economics and information asymmetries
(Dosi, 1988), individuals tend to pursue non-rational goals instead of undertaking rational
actions, such as maximizing profits. The object of analysis in TCT is transaction which is
defined as an event which occurs when a good or service is transferred across technologically
separable interface within the frame of contractual relationship, implying concessions among
agents involved. The relationships may be inter- or intra-firm (Williamson, 1985). The
transaction is characterized by three intrinsic attributes: frequency, uncertainty and asset
specificity (Williamson, 1981). Limited rationality of economic agents leads to the situation
when they are not able to make agreements which can predict and adjust measures for all
transactions that may take place in the future. The theory puts emphasis on efficiency of
transactions between different production facilities and their transaction costs as the basis for
choice between internalization and use of markets (Coase, 1937).
1.1.3 Eclectic paradigm, or OLI framework
Eclectic Paradigm developed by John Dunning (1977, 1981, 1988, 1998) is aimed to
explain why MNCs exist and why they may be comparatively more successful than domestic
firms (Hymer, 1976; Dunning, 1988). It is an approach which explains the motivations, location
and way of development of cross-border production of MNCs through FDI. The eclectic
9
paradigm suggests that a firm should possess three types of advantages while internationalizing
its activities: ownership (O), location (L) and internalization (I) advantages. The combination of
all three types of advantages is preferable if MNC decides to enter foreign country through FDI
rather than other modes of entry (Dunning, 1981). For instance, Dunning claims that prerequisite
for establishing international production is the existence of ownership-specific advantage that
can bring benefit to the company in case if it is transferred across national boundaries rather than
sold. Herewith, ownership advantage means ownership of tangible (equipment, machinery) or
intangible assets (knowledge, property rights, trademarks, licenses). Location advantage implies
place or country chosen based on business opportunity to extract benefits from country’s
resources. Internalization advantage is based on perceived advantage of integration of firm’s
internal or cross-border market activities (Rugman, 2011). A tendency of the firm to internalize
overseas makers of these and attractiveness of location for overseas production, as a rule,
increases overseas production. Hence, this tendency will vary based on motives behind
production activities: market-seeking, resource-seeking or efficiency seeking motive.
Motives
that
companies
pursue
entering
foreign
market
also
affect
the
internationalization strategies of companies. Following the classification conceptualized by
Dunning’s eclectic paradigm (Dunning & Lundan, 2008), companies from EMs have resourceand capability-seeking motives whereas DMFs pursue market- and efficiency-seeking motives.
EMFs demonstrate gradual market commitment starting operations from exports and then
moving to mergers with and acquisitions of small firms in DMs. This helps them to mitigate
LOF by obtaining strategic resources.
1.1.4 Uppsala theory of internalization
The intellectual approach to internationalization of the firm constructed by Johanson and
Wiederscheim-Paul accounts for attitudes and actual behavior of the firm. The authors state that
firms start internationalization from local markets incrementally increasing resource
commitment: no regular export, export through representatives, establishing wholly-owned sales
subsidiaries and production facilities. Such approach is explained by the fact that firm gains
information about foreign markets. It also implies that stage of internationalization influences
perceived opportunities and risks, which subsequently affect firm’s decisions on resource
commitment and current activities (Johanson &Vahlne, 1990). The theory was further expanded
accommodated dynamics, processes of learning, organizational trust and level of commitment.
However, the theory doesn’t explain inorganic growth strategies of foreign business operations.
1.1.5 Resource-based-view (RBV) theory
According to Penrose (1959) who is considered to be a pioneer of the RBV theory, there
is direct relationship between different types of firm’s resources and ideas, knowledge and
10
experience of its managers and owners. Thus, resources become the basis for achieving
competitive advantages (Grant, 1991). The firm needs to utilize its tangible and intangible
resources, including firm-specific managerial resources to facilitate sustainable growth
(Wernerfelt, 1984). Specifically, resources need to be valuable, rare, difficult to imitate and
irreplaceable. The differences in performance of firms are explained by the heterogeneity of
firms’ resources (Barney, 1991). It is hypothesized that firms that possess significant advantage
if other firms do not have such reproducible resources. In Rugman’s and Verbeke’s view, the
ultimate goal of firm’s decisions in resource-based approach is to gain abnormal returns as
compared to rivals. The internationalization of the firm is a common way to obtain exclusive
resources through strategic alliances or acquisitions (Karim & Mitchell, 2000). Moreover, they
allow to create value as they increase economies of scale and/or scope, increase bargaining
power over customers and suppliers (Barney, 1986). In other words, firms may grow much faster
if they select inorganic strategies rather than organic.
1.1.6 Liability of foreignness
Liability of foreignness (LOF) is one of the well-established concepts of international
business. It presumes that companies incur additional economic and social costs when they
internationalize. It has been initially introduced by Hymer (1976). He distinguishes four types of
disadvantages the company has when entering foreign market as compared to local firms:
•
Lack of information: the company face costs of acquiring the information which
domestic firms already have;
•
Foreign exchange currency fluctuation risk;
•
Host governments can undertake discriminatory measures to foreign firms so that
the latter pay additional costs for establishing operations;
•
Home governments can also restrict companies’ foreign expansion.
The firm-specific sources of LOF are named by Hymer (1976) as CDBA that stands for
«cost of doing business abroad». These costs do not depend on the output, so they are considered
to be fixed and they are supposed to diminish the longer the company operates in the foreign
market. Moreover, they are much higher than the costs that domestic firms incur in their local
market.
11
Price
Costs of Doing Business Abroad (Lost profit)
Marginal cost
MNE's Average
cost
Local Firms'
Average cost
Figure 1 Costs of doing business abroad
Source: Hymer (1976)
In the figure above two rectangles (dark grey and grey) show the profit that the local
firms earn, while blue one demonstrates the profit earned by MNEs in the host market, which is
much lower due to the fact that MNE faces CDBA. The latter are illustrated by cost curve of
MNE lying above the cost curve of the local firm (Wöcke & Moodley). In order to offset CBDA
MNE need to have a firm-specific advantage, which either can facilitate sales growth or reduce
costs.
Some cultural and economic challenges can be eliminated over time, while other such as
government discrimination remain longer and put the foreign firm in unfavorable position in
comparison with local firms (Eden & Miller, 2004).
Several scholars (Buckley & Casson, 1976; Hennart, 1982) suggest their lists of
additional costs, which can be associated with doing business abroad:
•
costs
of
resources,
communications,
management,
host
government
discrimination;
•
costs of travel, communication, foreign exchange, lack of information about host
country culture, institutions.
Eden and Miller (2004) argue that LOF does not equal CDBA, but rather LOF is a key
component of CBDA. The former refers to social costs the company incurs while operating
abroad, in particular, costs of dealing with unfamiliarity, discriminatory and relational
challenges. These challenges arise from institutional distance. CBDA concept embraces not only
12
social costs, but also economic costs such as cost of production, marketing and distribution,
transportation, communications, foreign exchange, trade barriers. These activity-based costs can
be easily measured, while social costs cannot be well anticipated and quantified, that is why LOF
remains the key challenge in doing business abroad.
The concept of LOF is closely related to the institutional distance (see figure below).
Institutional distance results in LOF represented by unfamiliarity, relational and discrimination
hazards that challenge the foreign firms’ legitimacy and increase costs of doing business. In
order to mitigate the influence of these hazards, firms need to select appropriate ownership
strategy in foreign market.
Geographic distance
Institutional distance
• Regulatory
• Normative
• Cognitive
Costs of Doing Business Abroad
• Activity-based costs
• LOF
o Unfamiliarity
Hazards
o Relational
Hazards
o Discrimination
Hazards
Ownership
strategy
% Equity
Ownership
Figure 2 Institutional Distance, Costs of Doing Business Abroad and Ownership Strategy
Source: Eden and Miller (2004)
According to Eden and Miller (2004), there are 3 hazards of LOF:
•
Unfamiliarity hazards. As the company lacks knowledge of the foreign market, it
needs to incur additional costs of acquiring information about its environment. LOF depends not
on the age of the firm, but rather on how long the firm operates in the host environment.
•
Discrimination hazards. LOF needed to be viewed from two standpoints:
unfamiliarity of the firm with host country environment and unfamiliarity of the host country
with the foreign firm, which enters the market. The latter results in versatile discriminatory
treatment of the government (political prerequisites (Henisz &Williamson, 1999) or consumers
(consumer ethnocentrism (Sundaram & Black, 1992)). So the company faces additional costs of
gaining external legitimacy.
•
Relational hazards. There are two types of them. The first is intra-organizational
costs. They are related to difficulties of managing people abroad: conflicting lines of authorities
(Sundaram & Black, 1992), opportunistic behavior (Hennart, 2001), and different cultural
backgrounds (Calhoun, 2002). Another kind of relational costs are inter-organizational costs,
which refer to cost of doing business with other parties. They include costs of negotiations,
13
monitoring, dispute settlement and trust building.
1.1.7 Institutional theory
The action system of the society is defined by institutional matrix that consists of formal
structure of delegation and control and a social structure (Selznick, 1948). Moreover,
institutional rules influence organizational structures and their implementation and,
subsequently, inter- and intra-firm relationships.
Institutions are defined by Scott (1995) as «regulative, normative, and cognitive
structures that provide stability and meaning to social behavior». Consequently, institutional
theory refers to the influence of laws, regulations, the judicial system and socio-cultural values
on decisions and behavior of the firm (North, 1990). There are two types of institutions that
impact and control individual and society actions: formal (e.g., economic rules, political rules,
including corruption, law enforcement, property rights protection, contracts adherence) and
informal (e.g., ethical norms, customs, traditions, code of conduct). According to North,
institutional regulations and provisions are particularly vital for overseas investment decisions
and firm performance. Trevino et al. (2008) stated that institutionalization process could
legitimize host market for a foreign investor, working through all three pillars: cognitive,
regulative and normative. Moreover, Alfaro et al. (2008) stated that high level of institutional
laws development could facilitate attraction of foreign investments and, in turn, utilization of
these investments for achieving higher economic growth.
Institutional theory, from sociological perspective, implies that institutional context,
referring to the combination of rules, informal constraints and the way of their enforcement,
predefines action patterns of the firms that may not reflect true economic efficiencies. It means
that apart from securing survival and success firms need to gain legitimacy (Scott, 1995). Scott
and Meyer (1994) suggest that an institutional model is comprised of several key elements. In
particular, the origins of environmental rationalization influence the pattern of organizing. These
origins result in particular dimensions of a rationalized environment, so that rules and ideologies
describing organizational practices create grounds for continuous changes in and across
organizations. These rules and ideologies lead to creation of specific mechanisms shaping
organizations and their action patterns. Finally, each organization with its identity and action
patterns is a result of institutional forces influencing it.
DiMaggio and Powell (1983) introduce three types of institutional pressures: coercive,
normative and mimetic. By responding to coercion, organizations illustrate procedural and
structural isomorphism. Organizations functioning in the same institutional environment
demonstrate structural similarities. This isomorphism influences organizations so that they aim
to gain external legitimacy, rather than focus on internal efficiency. External assessment criteria
14
are employed in order to identify the value of structural elements. Reliance on external
institutions reduces volatility and secures stability. Based on this typology of Meyer et al. (1991)
states that regulatory pillar of institutional context reflect coercive pressures, normative
corresponds to normative pressures and cognitive elaborates the concept of mimetic pressures.
Institutional theory represents useful tool for explaining the choice of organization
ownership strategy, as organizations have to gain and maintain legitimacy, thus selecting
governance modes that can attenuate institutional pressures. First, the three pillars of institutional
environment provide bases for obtaining legitimacy as organizations are rewarded if they deploy
structures, policies and practices that are considered appropriate within some socially
constructed system of norms, values and beliefs (Suchman, 1995). Second, institutional theory is
contingent on cross-country differences in institutional factors. Although regulatory pillar has
been integrated in transaction cost theory, it does not account for normative and cognitive
institutional aspects. So, some governance mode decisions may be sensitive to various
idiosyncratic institutional pressures, e.g., existing value systems, legal rules and cognitive
practices.
1.1.8 Institutional distance
Initially, institutional distance was introduced by Johanson and Vahle (1977), Hofstede
(1980), Kogut and Singh (1988) who sought to examine how the differences in economic
development, languages, educational level and culture influence internationalization strategies of
firms. Kostova (1996) tried to understand how home and host country institutional environments
influence the transfer of practices from headquarters to subsidiaries, taking into account internal
and external environment factors. After Kostova's publication, number of research devoted to
internationalization of emerging market firms have emerged (Dikova & Wittloostujn, 2007; Peng
et al, 2009).
The study includes the discussion of cultural distance which indicates differences
between home and host country (Hall, 1976, Kogut & Singh, 1988). The distance implies
uncertainty that constraints flow of knowledge and information and increases costs of doing
business abroad.
Johanson and Vahlne (1977) have developed a concept of “psychic distance” in order to
capture differences across countries and analyze adaptation of business to foreign institutions.
The concept refers to combination of factors that impede information flow from home and host
market and accommodates “differences in language, education, business practices, culture and
industrial development” (Johanson & Vahlne, 1977).
Based on four Hofstede’s cultural
dimensions, Kogut and Singh (1988) suggested assessment of cultural distance. These
dimensions
include
uncertainty
avoidance,
masculinity/feminity,
power
distance,
15
individualism/collectivism. These pillars were measure across IBM managers in 40 countries in
the 1970s. Later the database was expanded to larger number of countries. However, the
methodology was criticized due to the fact that the study was based on IBM corporate culture
only. Another limitation is that the variables are static and do not change over time while cultural
peculiarities of country population are constantly evolving. Due to these limitations, empirical
results based on the methodology is ambiguous and contradictory (Slangen & Hennart, 2007).
Different scholars sought to approach the concept of institutional distance from various
perspectives. Hennart and Larimo (1998) tried to account for cultural differences based on
transaction cost theory. According to Ghemawat (2001), there are the following pillars of
distance:
•
Geographic distance (physical distance between countries and the size of host
market;
•
Economic distance (differences in market size, amount of natural, human,
financial resources; purchasing power, access to knowledge);
•
Cultural distance (differences in languages, religion, norms, values);
•
Institutional distance (differences in economic and political systems as well as
colonial heritage).
Generally, this literature refers to the influence of institutional distance on two aspects:
•
Gaining legitimacy in host market;
•
Possibility to transfer organizational practices (Xu & Shenkar, 2002).
These scholars suggested extending the scope of the concept by trying to understand
process of location and entry mode selection. New insights on the issues emphasized that
cultural distance is only one of the pillars of institutional distance (Berry, et al., 2010), trying to
integrate diversity of differences across countries. The table below illustrates of types of
differences proposed by Berry et al. (2010).
Table 1 Institutional distance dimensions
Dimension of distance
Economic
Financial
Political
Definition
Differences
in
economic
development
and
macroeconomic
characteristics
Differences in financial sector development
Differences in political stability, democracy and trade asociations
membership
Administrative
Differences in colonial ties language, religion, legal system
Cultural
Differences in attitudes towards authority, trust, individuality,
16
balance between work and family
Demographic
Differences in demographic characteristics
Knowledge
Differences in patents and scientific development
Connectedness
Differences in tourism and internet usage
Geographic
Distance between capitals of counties
Source: Berry et al (2010).
However, Kostova and Zaheer (1999) truly contributed to research on influence of
institutional distance on performance of firms in foreign markets by suggesting such dimensions
of institutional distance as regulatory, cognitive and normative. Our research is based on their
classification.
Regulatory dimension presumes formal laws and regulations sanctioned by the
government (Xu & Shenkar, 2002). They can be easily identified and interpreted by foreign
firms. Normative dimension relates to the ideas and norms, which are considered legitimate in
the society (Kostova, 1997). They are deeply rooted in culture and tacit, so they are opaque to
foreign firms. Cognitive institutions refer to values, beliefs and mentality of people, their
traditions, symbols, and stereotypes.
There are two types of challenges that MNCs encounter abroad due to institutional
distance. Firstly, embeddedness in different institutional contexts inhibits interaction between a
company and its foreign subsidiary, thus impeding internal coordination and integration between
them and, secondly, institutional pressures from home environment that impede adoption of
host-country practices.
1.1.9 Institutional distance and ownership strategies
Variations in international business strategies and operations are traditionally explained
by the concept of «distance». If the distance between home and host country is large, MNCs
need to manage normative, regulatory and cognitive differences and choose appropriate
ownership strategies, adjust organizational forms and practices to account for the differences
(Johansen & Vahlne, 1977; Kogut & Singh, 1988; Kostova & Roth, 2002).
Multinational corporations (MNCs) decide on what ownership strategy to pursue in
foreign subsidiary by examining such crucial considerations, as level of ownership control and
resource commitment (Taylor & Zou, 1998; Delios & Beamish, 1999). Transaction cost theory
suggests that uncertainty of host market environment impedes negotiating with and interpreting
actions of foreign partners. Increased ownership control reduces transaction costs, thus,
improving governance efficiency (Brouthers & Hennart, 2007; Yang, 2015). However, scholars
suggest that in case when firms do not evaluate transaction costs they opt for lower ownership
strategy in order to diversify investment risks in unfamiliar market (Zhao et al, 2004).
17
Consequently, institutional theory strives to improve entry strategy research serving as
alternative framework for analysis of national differences (Martin, 2014). Institutional theory
proponents claim that institutions provide rules of the game that companies should adhere to
obtain legitimacy crucial for their survival (DiMaggio & Powell, 1983). Dissimilarities between
home and host country environment leads to a situation when foreign firm faces threat of
obtaining external legitimacy, selection of proper entry mode becomes crucial for mitigating the
threat (Estrin et al, 2007).
Entry modes choice implies diverse strategies ranging from modes with the lowest
commitment such as exporting, licensing or franchising to the modes with the highest
commitment such as foreign direct investment. FDI can be conducted in two ways. First way is
to establish a production facility (Greenfield investment) or acquire already existing business
(acquisition). Second decision refers to the issue whether the company establishes business alone
or in cooperation with local partner. (Peng et al., 2008). Each mode of entry is characterized by
particular level of commitment, control and property pursued by the firm. The availability and
need for resources is another crucial issue which should be considered in order to reach strategic
goals of the company (Meyer & Estrin, 2001).
In academic literature on international management choice of entry mode is one of the
major area of study (Werner, 2002). According to Cho and Padmanabhan (1995), studies are
most commonly devoted to the two directions. The first type of research is aimed to examine
factors which influence the choice between greenfield investments and acquissition (Hennart &
Park, 1993; Brouther & Brouthers, 2000; Harzing, 2002; Larimo, 2003; Dikova &
Witteloostuijin, 2007), the second seeks to analyze the decision whether to share control over
operation by establishing joint venture or independent subsidiary.
Li et al. (2012) strive to explain entry mode decisions of emerging-market firms into
developed markets based on interorganizational imitation theory. They state that these firms pay
particular differential attention to prior actions of reference groups – by type of country of origin
and by entry mode.
Despite theoretical development is this area, Slangen and Hennart (2007) claim that there
is the need to construct theories which would explain factors determining choice on entry mode.
Analytical frameworks proposed by scholars are dedicated primarily to firm-specific factors or
industry-specific or both. However, there is a number of studies which analyze the influence of
institutional environment on entry mode selection. Specifically, Estrin et al. (2009) have
analyzed institutional distance based on North's classification. It is divided into two fundamental
pillars:
•
Formal institutions which comprise set of rules with which economic actors have
18
to interact;
•
Informal institutions that refer to norms, values and beliefs shared by society.
It is stated that institutional distance impact ownership strategy through 3 mechanisms.
The first one is external isomorphic pressure, which results in adoption of lower level ownership
strategies to gain legitimacy in a host market (Agarwal & Ramaswamy, 1991). Second,
institutional distance accentuates liability of foreignness that refers to additional costs caused by
discrimination and unfamiliarity hazards faced by foreign firms. One of the ways to mitigate
liability of foreignness may be lower level of control over foreign operations (Eden & Miller,
2004). Third, MNE tend to deploy lower ownership strategies as institutional distance impedes
knowledge and managerial practices transferability to foreign subsidiaries of a firm (Xu &
Shenkar, 2002).
To summarize, DiMaggio and Powell (1983) introduced three types of institutuional
pressure: coercive, mimetic and normative. Agarwal and Ramaswamy (1991) stated that these
pressures result in two challenges faced by the firm: attenuate legitimacy threat and to obtain
governance efficiency. Further, Kostova and Zaheer (1999) suggested classification of three
types of institutional distance that create institutional pressure: regulatory, cognitive and
normative, respectively. So, in order to overcome challenges caused by institutional pressures,
firms have to choose and pursue proper ownership strategies. Thus, based on institution-based
view, we present the conception framework of this paper below.
19
Regulative
distance
Cognitive
distance
Normative
distance
Explicit market-supporting
regulations and rules
Coercive isomorphism
pressures for conformaty
Implicit culture
Mimetic isomorphism
pressures for conformity
Implicit societal values and
norms
Normative isomorphism
pressures for conformity
Home-Host
Context
EMNCs' low
ownership position
to alleviate
legitimacy threat
EMNNCs' high
ownership control to
gain governance
efficiency
EMNCs’ Ownership
Strategy
Geographic distance
Host Market Size
Figure 3 Conceptual framework of Institutions and EMNCs' Ownership Strategy
Source: Adopted from Liou et al. (2015); Agarwal & Ramaswamy (1991); Kostova &
Zaheer (1999); DiMaggio & Powell (1983)
To sum up, it should be highlighted that many scholars in international business sought to
explain internalization process of companies from different perspectives: transaction cost theory,
resource-based view, eclectic paradigm, institutional theory etc. In this paper we draw upon the
concept of institutional distance suggested by Kostova and Zaheer (1999). Institutional distance
is a crucial issue in international business literature and has direct impact on internationalization
process of companies. The success of overseas operations depends on decision on choice of
entry mode of the company which reflects operating efficiency of foreign subsidiary and
competitiveness of MNC (Cuervo-Cazuro & Narula, 2015).
1.1.10 Institutional distance in Emerging and Developed markets
Contemporary international trade is characterized by the following trends: growing
internationalization of EMFS, regionalization of MNEs and rise of number of multilateral
regional trade agreements (RTAs).
20
Emerging economies are defined as «low-income, rapid growth countries using economic
liberalization as their primary engine for growth» (Hoskisson et al., 2000). They are
characterized by undeveloped infrastructure and capital markets (Khanna & Palepu, 1997).
Nevertheless, they are very import part of global economy as they account for more than half of
world’s population (Global Edge, 2006) and comprise 30% of world GDP and 45% of world’s
exports. Prior literature on IB has been focused on research on developed country MNEs (e.g.
Johanson & Vahlne, 1977, Rugman & Verbeke, 2004). Thus, EMFs global orientation is
understudied.
Due to international trade restrictions in emerging economies such as policies favoring
import substitution over exports, preference for non-market approaches to economic growth,
tariff barriers, they have latecomer status to internationalization and have to overcome obstacles
that DMFs have overcome long ago (Luo & Tung, 2007; Ramamurti, 2009). However,
governments in EM have been adopting greater openness and promotion of internationalization,
partially due to greater competition from developed market firms which enter their home
markets.
Another major dissimilarity of EMFs from their developed markets counterparts is that
they possess fewer firm-specific advantages that can provide competitive edge in
internationalization, so they need to catch up and find new sources of advantage such as cost
leadership (Aulakh et al. 2000). In order to catch up, they frequently leapfrog some stages of
internationalization, trying to compensate asset gaps and latecomer status disadvantages (Luo &
Tung, 2007). That is why there are eager to obtain cutting-edge technologies and best practices
or draw on home-specific advantages such as low labor costs or preferential access to rich base
of natural resources.
Thirdly, there are institutional constraints that EMFs encounter in their home markets
such as property rights protection and law enforcement, poor developed infrastructure,
corruption, limited market size, political instability. These limitations raise the costs and risks of
doing business, while creating greater volatility.
Some scholars addressed the ownership strategies of EMFs either in developed or
emerging countries. For example, Li et al. (2012) strive to explain entry mode decisions of
emerging-market firms into developed markets based on interorganizational imitation theory.
They state that these firms pay particular differential attention to prior actions of reference
groups – by type of country of origin and by entry mode.
Delios and Henisz (2003) claimed that institutional distance is particularly critical for
Western MNCs that enter emerging economies where regulatory environment impede
international business. Legal regulations for market transactions are considered to be less
21
extensive, there may be inefficient law enforcement, especially with regard to property rights
protection. In order to accommodate variations in institutional development forms needs to
develop managerial practices and routines for collecting and interpreting information. Firms
need to account for institutional differences in order to gain legitimacy in host market and
transfer organizational practices and knowledge (Xu & Shenkar, 2003). The greater the
difference between home and host countries, the more difficult the adaptation. That is why
emerging countries firms can overcome challenges of adaptation more easily when they enter
similar institutional environment. Thus, we draw upon this line of argumentation and state that
we need to examine institutional factors affecting ownership strategies of EMFs separately in
emerging countries and developed countries.
Host country
Emerging markets
Developed markets
Low
High
Medium
Low
Emerging markets
Home country
Developed markets
Figure 4 Internationalization Paths and Liability of Foreignness
Source: Gaur and Kumar (2011)
As a rule, institutions are underdeveloped in emerging markets. So, companies there have
to develop its political, organizational capabilities in order to compensate for disadvantages
arising from lack of efficient institutions needed for market-based economic transactions. These
capabilities can help companies to internationalize to other emerging markets with similar level
of institutions development. Firms from developed markets may face lower LOF than firms from
emerging markets. Additionally, as the difference in institution development between home and
host country increases, LOF becomes higher. However, firms from developed countries have an
advantage over emerging markets firms in this case, although the institutional distance is the
same. This can be attributed to the fact that firms from DM build very strong brands and their
products are often associated with inferior quality (Gaur & Kumar, 2011). Given the
argumentation above and the fact that different levels of LOF result in pursue of different
strategies, we state that ownership strategies of EMFs varies across develop and emerging
economies.
1.2 Hypothesis Development
Institutional distance is defined as the extent of similarity or difference between home
and host countries’ institutions (Kostova, 1997). It results in barriers for an MNC to extract
22
benefits from internationalization to full extent (Dikova et al. 2010).
Institutional theory suggests that ownership strategy of the company is influenced by
difference of uncertainty between home and host country environment. Specifically, larger
dissimilarity between institutional factors lead to lower ownership strategy in order the company
could remain flexible if it faces investment risks (Brouthers & Hennart, 2007). Moreover, the
company thus strives to mitigate risks of opportunistic behavior of partners, lack of knowledge
about foreign market. Xu et al. (2004) have proved that larger institutional distance leads to
lower ownership participation. Similarly, Dikova et al. (2010) have provided empirical evidence
that there is less likelihood of cross-border M&A deal completion if the acquiring firm
encounters larger formal and informal institutional distance.
The majority of cross-border M&As studies focus on informal institutional distance to
accommodate dissimilarity in regulatory environment, while national cultural differences are
subject to informal institutional research (Dikova et al., 2010).
Firms, which enter host market, need to gain legitimacy by responding to institutional
pressure (Raaijmakers et al., 2015), it can be accomplished through the number of means. In
order to respond to regulative pressures, such as regulations and laws which are explicitly
codified and enforced by government agencies, and operate legally, a firm needs to adjust its
practices to adhere to host country rules (Scott, 1995).
Following informal institutional
requirements presents a greater challenge for foreign firms as they need to centralize coercive
mechanism to gain legitimacy (Kostova & Zaheer, 1999).
Gaur and V. Kumar (2011) in one of the recently published articles strive to examine how
firms entering foreign markets interact with home and host country environment based on
concept of liability of foreignness. They state that LOF is derived from two sources. One source
is home and host country environment-specific factors such as home and the host country
governments, institutions, the nature and structure of industry and culture (Nachum, 2003).
Larger institutional distance results in higher LOF, increasing additional cost of doing
business in the host market (Bajk et al., 2013). Lack of knowledge about host market,
relationships with the local firms, discrimination hazards lead to legitimacy threat for a foreign
firm (Eden & Miller, 2004). In order to mitigate effect of LOF firms can cooperate with local
partners with the existing external legitimacy and can provide necessary knowledge and access
to the existing business network of suppliers and consumers (Xu et al, 2004).
The choice of proper entry mode is a prerequisite for successful operations of the
company in the host market. The entry method should allow to take the most of firm-specific
advantages and to accommodate risks, which result from market uncertainty. Some scholars
consider that companies need to choose and intermediary ownership strategy in foreign market
23
in order to overcome the LOF effect, to gain access to local resources and business networks,
while other stand for the opinion that wholly owned subsidiaries decrease transaction costs
(Dunning, 1988) and help firms to utilize their unique firm resources capabilities to the
maximum extent possible (Hymer, 1976).
However, from a dynamic perspective contemporary firms should go beyond the tradeoff of exploitation and exploration to sustain its competitive advantage (Hamel & Prahalad,
1990). They should deploy its own resources while extracting benefits from external
environment.
Buckley and Casson (1998) developed a very comprehensive work linking economic
costs to entry mode decision. They tried to predict which mode entry the company would choose
taking into account cost of production abroad, transaction costs, production technology
adaptation and information costs. However, they ignored socio-institutional costs.
Davis et al. (2000) argue that the decision on mode of entry is largely rely on tradeoff
between local responsiveness and global integration. They found out that exporting helps to
achieve the highest host-country isomorphism, while wholly owned subsidiaries mostly conform
to parent -company practices.
El Said and McDonald (2002) in their studies empathize importance of reliance on either
formal or informal institutions when choosing the market entry strategy. In developed countries
formal institutions are well established while in emerging countries they are, on the contrary,
weak and the role of networks, trust is crucial there. That explains the reason, why foreign firms
prefer to have local partners there.
Xu and Shenkar (2002) propose that the higher the institutional distance between
countries, the more likely that the foreign country would prefer low ownership strategy due to
twin challenges of achieving external legitimacy and parent company isomorphism.
Eden and Miller (2004) go further and examine influence of CDBA (not only economic,
but also social costs) caused by institutional and geographic distances on ownership strategy that
the company pursues. Ownership strategy refers to the percentage of equity the company hold in
its foreign operations. 0% represents exporting while 100% - wholly owned subsidiary. They
suggest that MNEs should select the entry method which would minimize CDBA, both
economic costs and costs resulting from LOF. As the activity-based costs can be easily identified
and quantified, costs of dealing with LOF become decisive and determine the firm’s ownership
strategy. They argue that as the institutional distance is increasing, the more likely that MNE
would choose the lower level of market commitment.
If the regulatory institutions are weak (lack of intellectual property rights protection),
then the inter-relational hazards are higher as foreign partners cannot be protected from
24
counterfeiting, opportunistic behavior of partners or intellectual piracy, so they will avoid
intermediary strategies.
Liou et al. (2016) state that higher informal distance (cognitive and normative) leads to
low-ownership strategies, thus, alleviating legitimacy threat, while large formal institutional
distance requires gaining of dominant ownership control. They also argue that home-market
conditions such as market size and efficiency of regulatory bodies exert additional moderating
effect.
1.2.1 Regulative distance
Regulatory pillar refers to rules and regulations that are taken for granted or supported by
law enforcement or public opinion (Nystrom, 1976) which are aimed at encouraging certain
behaviors and discouraging other. Regulatory pillar corresponds to coercive mechanisms that are
typically enforced by a powerful actor in order to secure compliance and are associated with
resource interdependence, state-sponsored legitimacy, governmental mandate and subtle political
processes. Firms undertake actions that establish and enhance their legitimacy, making them
adhere to prevailing regulations, rules and requirements (Oliver, 1991).
Economic Freedom
Economic freedom is frequently used as a measure of regulative environment in literature
devoted the influence of institutional distance on market entry modes. It refers to lack of
government constraints on production, distribution and consumption of goods and services. The
Heritage Foundation has been capturing level of development of regulatory environment in 186
countries by tracking time-variance index of economic freedom since 1995 (Johnson and
Sheeny, 1996).
Dissimilarity in level of economic freedom can be a source of uncertainty and result in
additional costs for MNEs (Demirbag et al., 2011). These costs are caused by unfamiliarity
hazards faced by MNE. Distance in level of economic freedom represents differences in strength
of market economy institutions. Previous research indicates that if economic distance is high and
a firm decides to conduct an acquisition, it may face government intervention in firm's activities
and strategies due to differences in antitrust regulations (Estrin et al., 2009) as well as
managerial problems. However, recent evidence on M&As deal provided by Contractor et al.
Contractor et al. (2014) suggest that when EMFs face lower institutional distance they opt for
minority acquisition over majority or full acquisition. The latter scholar focused on Chinese and
Indian firms. In line with their findings we suggest to test the following hypothesis for Russian
firms:
Hypothesis 1. The larger the distance in Economic Freedom between Russia and a host
market, the more likely a Russian firm will opt for higher ownership stake.
25
There are two types of regulatory environment: less restrictive and more restrictive. In the
first case, governments initiate policies that are based on trust and goodwill. In such environment
civil and political rights as well as media interdependence are well protected, corruption is
minimized and laws and regulations are respected. On the contrary, in more restrictive
environments, laws are poorly enforced, legal protection is weak, policies and practices are
ambiguous and immature, and governments are less effective.
It is difficult to gain legitimacy in more restrictive institutional environments as it is
complicated to overcome regulatory restrictions in such country-specific regulatory
environments. In such environments, firms deploy lower ownership strategy, for example, by
making partnerships with local partners. This allows to access knowledge about host country
rules and regulations, thus mitigating liability of foreignness (Zaheer, 1995).
However, firms originating from emerging are familiar with how to deal with regulatory
unprotectability and inefficiencies in such markets. The capability of firms to cope with and
capitalize on institutional voids represents a unique asset of EMFs that can utilize it in order to
compete with multinationals in their home countries and in other emerging market (Khanna &
Palepu, 2006). Operating in low information transparency environment, EMFs are more likely to
adopt command structures in order to deal with high uncertainty.
On the contrary, EMFs are not familiar with less restrictive environments. Although firms
from
developed
markets
which
invest
in
emerging
markets
has
provided
some
internationalization knowledge to EMFs, the latter have not gained any useful insights of how to
deal with regulatory conditions in developed markets. So, inward investments do not curtail
liability of foreignness of EMFs, particularly in developed markets (Luo & Tung, 2007). Seeking
to learn fast how to cope with regulatory environment in advanced economies, EMFs would
prefer to establish any kind of partnerships with local actors.
However, this lack of experience may not obligatory lead to adoption of lower ownership
stake of EMFs in the process of internationalization in developed markets. Emerging economies
demonstrate totally different approaches to work culture and labor management as compared to
developed countries. Managers of EMFs face bureaucratic approach in their home market,
pervasive corruption, so they may be unable to adapt to highly competitive environment of
developed markets. At the same time, reluctance of EMFs to adopt new organizational structures
and practices in acquired firm in developed market can be even higher as their managerial
approaches are inefficient, so adaptation complications discourage them from acquiring minority
shares.
Emerging countries have less strict requirements for listing and registration in a stork
market of the companies, weaker protection of investor rights, less stringent accounting
26
standards (Marosi & Massound, 2008). So, entering of firms originating from emerging markets
the markets with stronger regulative institutions can be beneficial for them and perceived as an
opportunity to advance accounting standards and attract foreign investors. So, EMFs can be
motivated to acquire majority stake.
Hypothesis 1 a. The positive relationship between distance in Economic Freedom
between Russia and a host market and the likelihood of adoption of higher ownership strategy is
stronger in developed host markets than in emerging.
Economic historians refer to economic freedom as a determinant of economic
development, growth in different countries (North, 1990). It is argued that higher level of
economic freedom is an important prerequisite for FDI inflows and should be developed by
policy makers, especially, in emerging markets (Cole, 2003). Countries with greater economic
freedom, which provide protection of private property and rights of foreign investors, receive
increased FDI inflows and become destination for active MNEs' operations. It has been found
out that in markets with higher investor protection, the likelihood of a firm to conduct an
acquisition is higher. It is further enhanced by the flexibility allowed for required restructuring of
acquired firm. In order to encourage FDI, emerging markets need to remove restrictions on
investments of foreign MNEs. If host countries secure favorable regulative context, MNEs tend
to show more commitment.
Political stability
Political risk arises from political violence, government instability and impact of military
coups and results in subsequent threat of property expropriation (Kobrin, 1979). More recent
research also illustrates the risk of indirect expropriation as a result of checks and balances
which represent institutional constraints (Henisz, 2000).
Political instability is often another distinctive feature of more restrictive environment.
Firms may opt for lower ownership in order to mitigate risks associated with political instability.
One of the ways to do that is to acquire minority stake in a firm owned by local firm that
possesses knowledge of how to cope with uncertainty caused by politically unstable
environment.
Political uncertainty results in frequent changes in industrial and economic policies,
policies relating to property protection, thus, influencing on performance of business operations.
These changes require alterations of firm's practices and increase costs of doing business abroad.
Kotabe (2005) state that firms entering politically stable countries are more prone to invest more
resources and conduct acquisitions rather than using collaborative ventures to minimize exposure
of specific assets.
27
Holburn and Zelner (2010) state that political institutions in firm's home market have and
impact on firm's ability to overcome political constraints in host markets. Firms originating from
countries with weaker institutional constraints on policy-making possess an advantage at dealing
with unfavorable policy outcomes as compared to their counterparts from countries with stronger
institutional constraints. The main prerequisites for this advantage are processes of imprinting –
utilization of representations of reality for interpreting environment and governing firm’s actions
under conditions of uncertainty - and organizational learning.
Hypothesis 2. The larger the distance in political stability between Russia and a host
market, the more likely a Russian firm will opt for higher ownership stake.
Political capabilities of a firm from emerging countries help to reduce unpredictability
associated with policy outcomes in countries with weak institutional constraints and,
consequently, attenuate entry-deterring effect of host country policies. In addition, these firmspecific capabilities may lead to firm’s superior performance and, thus, firms are more prone to
commit more resource and, thus, use entry modes with higher level of control for entering other
host countries with lower political stability.
Hypothesis 2 a. The larger the distance in political stability between Russia and a
developed host market, the more likely a Russian firm will opt for higher ownership stake.
Hypothesis 2 b. The distance in political stability between Russia and an emerging host
market will not impact ownership-related decisions of Russian firms.
Doing Business
We argue that we can measure distance in doing business in order to capture dissimilarity
in regulatory quality and efficiency in Russia and a host market. No studies in international
distance apply this measure for discussion of ownership-related decisions of firms in the process
of internationalization. We state that Ease of Doing business covers aspects that can be crucial
for a foreign investor in the process of selection proper ownership strategy for entering a
particular market such as conditions for starting business, ease of getting versatile permissions,
protection of property rights, registration of the business, labor market regulations etc. We
believe that in host markets where business regulations are very complicated and cumbersome
investors would prefer to transfer these bureaucratic issues on local counterparts, thus, choosing
ownership strategies with lower commitment. So, we aim to assess significance of this factor.
Hypothesis 3. The larger the distance in Doing business between Russia and a host
market, the more likely a Russian firm will opt for lower ownership stake.
This measure from year to year also embraces new business reforms. As emerging
markets are at the stages of rapid development they tend to introduce more new regulations that
can be very unpredictable and sometimes even illogical. Thus, we suppose that in order to
28
attenuate the influence of the uncertainty Russian firms will be reluctant to commit more
resources if the dissimilarity of these regulations is higher.
Hypothesis 3 a. The larger the distance in Doing business between Russia and an
emerging host market, the more likely a Russian firm will opt for lower ownership stake.
Developed markets, on the contrary are considered more stable and less restrictive, legal
and economic regulations are already well-developed there, so foreign investors are unlikely face
substantial shift in policy, thus we believe that this measure will have no influence on decisions
regarding ownership strategies of Russian firms in developed markets.
Hypothesis 3 b. The distance in Doing business between Russian and a host developed
market will not impact ownership-related decisions of Russian firms.
Corruption
According to recent research (Slangen, Van Tulder, 2009), scholars emphasize the
influence of host country governance structure on ownership strategies. One of the most
important dimensions of this infrastructure is corruption that has broad effect on the economy.
Such dimension of institutional distance as corruption was first introduced by Habib and
Zurawicki (2002) who found out that corruption distance had negative correlation with FDI.
Demirbag et al. was the first scholar who examined the influence of corruption distance on entry
modes. This study presented evidence on higher likelihood of establishment of joint ventures in
case of greater corruption distance. Based on data from Central and Eastern European countries,
Bhaumik et al. (2010) have identified negative correlation between corruption distance and level
of foreign ownership.
Corruption refers to inappropriate business practice (Lambert-Mogiliansky et al., 2007)
or issues that impedes the legal system. In some works, (DiRienzo et al., 2007) corruption is
viewed as an economic externality which increases costs of doing business in foreign countries,
while others compare it with other host country factors (Rodriguez et al., 2006).
Corruption is defined as any action against legal system resulting in improper business
practices and is considered to affect all aspects of economic and social life (Kaufmann & Kraay,
2008) or misuse of public power for private benefit. (Rodruguez et al., 2005). It can be
exemplified by the sale of government property and misappropriation of public funds by public
officials, bribery, nepotism, and patronage. Corruption, being present in all levels of society, is
believed to impede economic growth, influence political and societal stability (Abed & Gupta,
2002) and reduce government legitimacy (Anderson & Tverdova, 2003). Corruption represents a
challenge not only for emerging countries, but also for advanced economies (Bellos & Subasat,
29
2012). According to OECD report (2013)1, corruption increases cost of doing business by 10%.
Moreover, International Monetary Fund estimates that investments into countries with high level
of corruption are 5% lower as compared to less corrupt countries. Thus, as firms take into
account this increase in costs of doing business associated with corruption, it influences strategic
decisions.
Public sector corruption is a challenge for entering firm which is not familiar it how this
corruption works. That is why the entering firm will likely prefer to establish relationships with
incumbent firms which are aware of the extent to which corruption is considered common and
whether it is effective or not (Rodriguez et al., 2005).
Hypothesis 4. The larger the distance in the level of corruption between Russia and a
host market, the more likely a Russian firm will opt for lower ownership stake.
Institutional theory examines political-related factors of host countries, but corruption in
emerging market becomes crucial factor in ownership strategies.
There are two characteristics of corruption: pervasiveness and arbitrariness (Rodriguez et
al., 2005). Both dimensions of corruption create uncertainty for foreign investors. The first
characteristic refers to the likelihood that the company will face corruption in its relationships
with government relationships while the second exhibits uncertainty of the outcomes of
corruption. In countries with pervasive corruption it is considered to be socially acceptable and
quite regular. In this case there is no point for a foreign company to select an intermediary
ownership strategy as the local company can neither influence the likelihood of bribery nor
reduce the payment. As this practice can be anticipated and does not negatively influence
external legitimacy, MNE is more likely to choose high ownership strategy.
Only in case the corruption is arbitrary, intermediary strategy can be preferable as the
local partner can reduce uncertainty of corruption. Furthermore, if the arbitrary corruption
distance between host and home country is high, choosing a local partner becomes even more
advisable. Such corruption usually exists in countries with weak formal regulations and
relations-driven economic transactions, so local partner can be valuable as a method to embed in
local social networks (Peng, 2003).
Arbitrariness of corruption can be exemplified by the situation when similar transactions
are treated in different ways. Uncertainty associated with corruption arbitrariness refers to the
ambiguity of corrupt transactions, while pervasiveness of corruption implies the average
likelihood of facing corruption in routine transactions with government officials. So,
pervasiveness of corruption is described as dispersion of corruption in public sector in a country.
1
Organization for Economic Co-operation and Development. (2014). Cleangovbiz. Integrity in practice [Data file].
Retrieved from https://www.oecd.org/cleangovbiz/49693613.pdf
30
Pervasive corruption is considered as being fully institutionalized in commercial operations.
Arbitrariness of corruption raises ethical uncertainty and, thus, liability of foreignness for MNEs
as well as reduces firm's ability to adhere to government regulations. In order to mitigate the
effect of arbitrariness, firms need to find other sources of stability and support. Cooperation with
local partner can reduce uncertainty as they have experience of interacting with local
government officials. It can also help to obtain external legitimacy. Subsequently, if foreign
actors are legitimized, the risk of encountering corrupt actors becomes lower. On the contrary, if
the firm is not seen as legitimate, it is less risky for state officials to behave in arbitrary fashion.
So, in order to reduce pressure of corruption, firms may prefer lower ownership strategy.
In terms of impact of pervasive corruption on ownership strategies, it is suggested that
such type of corruption reduces the benefits of having the local partner. As soon as MNEs
encounter corruption and complies with it, it gains political access that decreases complexity of
institutional environment. In this case local partner can enable to reduce risk of potential
damages. However, they can face resistance from their home governments, which monitor
corrupt practices in foreign operation of firms and their JV partners. This is especially relevant
for firms originating from developed countries and operating in emerging markets where
corruption is pervasive (Uhlenbruck et al., 2006). In case of EMF, their home market regulations
do not make them accountable for corrupt practices of their JV partners. So, in case if they enter
other emerging countries where arbitrariness and pervasiveness is even more pronounced, they
will also opt for lower ownership to gain local legitimacy.
Research on the impact of corruption on ownership strategies demonstrates contradictory
results. Smarzynska and Wei (2002) state that foreign investors perceive high level of corruption
as a risk factor and, thus, avoid ownership strategies, which require higher commitment of
resources. Uhlenbruck et al. (2006) find that if the level of pervasiveness of corruption is high,
companies are prone to acquire more control over subsidiaries. Asiedu and Esfahani (2001) find
no influence of corruption on ownership strategies of American companies.
However, Lui (1996) state that under certain conditions bribery can help international
firms to overcome bureaucratic complications at relatively little cost and, thus, increase,
efficiency. So, it can serve as a tool for circumventing strict economic regulations and, thus,
even encouraging foreign investment.
Tekin-Koru (2006) presented evidence that firms from countries with lower level of
corruption prefer acquiring higher stake as compared to firms from less corrupt countries.
Duanmu (2011) found that in case of larger corruption distance between emerging country and
host country firms prefer to establish wholly owned subsidiaries. Based on the example of China,
Duanmu stated that if the level of corruption in the home market is lower than in China, the
31
firms would favor acquisitions rather than joint ventures.
In vein of developing institutional theory, Uhlenbruck et al. (2006) examined that if a
firm enters emerging economy, it will adapt to corruption-related challenges by establishing
partnerships with local companies and developing adaptive strategy. Selecting joint venture as an
entry mode relies on the trade-off between having a local partner who helps to cope with
complications of institutional systems and its opportunistic behavior that can lead to lower
returns for foreign investor and expropriation of assets (Henisz, 2000). Monitoring of local
partner behavior also represents additional cost of doing business. Although having local partner
is beneficial for overcoming bureaucratic issues and dealing with corrupt officials, this also leads
to poor protection of specific assets of a foreign firm (Wu, 2006). Misappropriation of assets can
result in a potential reputation damage.
Based on argumentation above, we argue that if firms enter emerging countries where
level of corruption differs from that in Russia, they will opt for lower ownership stake in order to
increase uncertainty associated with pervasiveness of corruption. In case of developed countries,
we believe that the negative relationship between corruption distance and ownership strategy
will be lower.
Hypothesis 4 a. The larger the distance in the level of corruption between Russia and a
host emerging market, the more likely a Russian firm will opt for lower ownership stake.
Hypothesis 4 b. The distance in the level of corruption between Russian and a host
developed market will not impact ownership-related decisions of Russian firms.
Membership in international organizations
Internationalization of EMFs is partly caused by global efforts to create «flatter» world
encouraging information, capital flows and imposing fewer barriers on trade (Ramamurti, 2009).
Entry in Regional trade agreements represents one of the ways for promoting flatter world that
exemplifies institutional change. These institutional changes in turn influence firm's strategy
(North, 1990). Peng et al. (2008) highlight that the role of context increases when institutions are
unstable, creating both constraints and opportunities and affecting firm's strategy. EMFs firms
can be influenced to the greater extent if there is more institutional variation in EMS and more
instability and acceptance of market mechanisms.
To date, the influence of economic and regional agreements on trade and foreign direct
investment have been studied primarily in macroeconomics literature (Bhagwati & Krueger,
1995). Literature on impact of such agreements on firm strategy has been devoted to how MNEs
select location of the production (Buckley, 2001).
So, membership in international organizations is another dimension of regulatory
distance between countries. We argue that fewer inter-state trade barriers and free flow of
32
investments developed by different types of economic and political integration positively
influence ownership strategies of Russian companies.
Hypothesis 5. The more the number of international organizations in which Russia and a
target host market have membership, the more likely that a Russian firm will opt for higher
ownership stake.
The majority of countries, being members of the same international organizations (CIS,
BRICS, Asia-Pacific Economic Cooperation, Shanghai Cooperation Organization, Eurasian
Economic Community) in which Russia also has membership are classified as emerging, so it is
logical to expect that Russia will adopt ownership strategies of higher commitment in emerging
countries.
Hypothesis 5 a. Membership of Russia and a target emerging market in the larger number
of the same international organizations will have positive relationship with Russian firm’s
ownership strategy.
Hypothesis 5 b. Membership of Russia and a target developed market in the larger
number of the same international organizations will not impact ownership-related decisions of a
Russian firm.
1.2.2 Cognitive distance
Decision makers in a firm construct cognitive categories as they comprehend the
environment which, in turn, determine strategic decisions. Professionals, the state and mass
media rationalize cultural rules and perceive firm performance as socially intrinsic and highly
dependent upon firm’s conformity to social rules and requirements needed to gain social support,
resources and, thus, legitimacy. In order to conform to these requirements and reach mimetic
isomorphism firms can imitate behaviors of referent actors, which are considered legitimate.
This strategy of imitating responses to environmental pressures appears to be successful and
efficient, especially in case of unpredictable environment. So if social actors prefer a certain type
of action and it is institutionalized, others will undertake the same action in order to gain
cognitive legitimacy in wider social structure (DiMaggio & Powell, 1983). Firms that do not
follow legitimized course of action can be considered inefficient and less responsive. Only few
EMFs possess international experience, so uncertainty for them may be perceived to be higher.
So, responding to these challenges, firms intensify mimetic behavior.
Cognitive pillar of the society also reflects how information is obtained, organized and
interpreted. It also determines the routines developed by organizations to shape employees
behavior in solving problems. Performance of the foreign affiliates is influenced by how
managers and employees process new information and relevance of adopted routines. This pillar
is very difficult to operationalize.
33
EMFs are believed to possess an advantage when they enter other emerging countries, as
they are better familiar with undeveloped institutional environment, although it depends on host
market conditions. Moreover, they do not need to adjust their business models to the dynamics
of emerging countries as compared to firms originating from developed countries. Moreover,
EMFs may have disadvantages if they enter developed countries as they lack resources and
capabilities to compete in more advanced environments. Thus, EMFs have to imitate more from
local partners through acquiring minority stakes in developed host countries.
Cultural distance contributes mostly to increased unfamiliarity hazards. The local partner
will help to meet these challenges. But once the foreign has incurred one-time costs of acquiring
information about local environment from its partner, it later acquires the share of the partner. It
is explained by the reluctance of companies to incur double-layered acculturation and to adapt to
each other. But if the cultural distance results not from cognitive institutions differences, but
rather from normative, then cooperation with local partner could be prolonged.
Cultural distance results in heterogeneous customer preferences, business practices and,
consequently, information asymmetry (Luo & Shenkar, 2011). It also increases costs and risks of
communications and management opportunistic behavior. It requires more time and effort to
learn about implicit cultural factors, thus presenting more challenges for MNCs than regulative
environment. According to Chen and Hennart (2004), when cultural dissimilarities are larger,
companies opt for lower resource commitment to diminish risks of uncertainties. In addition,
Barkema and Vermeulen (1998) have found that partly owned acquisitions dominate complete
acquisition in case of greater cultural distance. Similarly, Tihanyi et al. (2005), based on
empirical study of entries US-based MNCs, claim that there is strong negative association
between cultural distance and entry mode choice. As for EMFs, Contractor et al. (2014) have
found that if uncertainty avoidance distance is high, there is likelihood that a firm would prefer
minority acquisition over majority one.
Implicit essence of cultural rules posits obstacles for EMFs to comply with legitimacy
requirements and manage acquired subsidiaries. According to profound cross-cultural research,
there is no universally accepted managerial approach to management of subsidiaries across all
cultures. In each particular country a firm needs to utilize a managerial approach that is coherent
to local employees’ values. In this case, job satisfaction would be higher and employees’
cooperation would be voluntarily. Cooperation of EMFs with acquired firm can result in better
support of local stakeholders (employees, suppliers) as operational practices of local firm are
congruent with local cultural beliefs and norms. Consequently, given the above argumentation, it
is reasonable to suggest that as cultural distance is increasing, there is more likelihood that the
firm will share ownership with local partner.
34
Diaspora
According to Buckley et al. (2007), historically MNCs from emerging markets enter
markets with large diaspora community that results in decrease in transaction costs. However,
some recent studies suggest that EMFs have invested in markets with no immigrant communities
(Luo & Tung, 2007). Luo and Tung (2007) point out that foreign entries of Chinese, Indian,
Mexican and Turkish firms epitomize that there is less dependence on ethnic ties and size of
diaspora community. They also claim that these firms-latecomers in the global market strive to
secure their tacit knowledge from culturally different countries and, that is why, use acquisition
as an entry mode. This argumentation contradicts entry mode literature, but mostly due to the
fact that the literature is based on experience of developed markets firms (Brouthers & Hennart,
2007). However, given asset-seeking motives of EMFs, the learning argument is applicable and
explains acquisitions and wholly-owned greenfield investments, thus diminishing the effect of
cultural distance on equity ownership of affiliates.
There is no consent among scholars regarding entry modes of MNCs from emerging
markets in case of high cultural distance. Some of them argue in favor of full or majority
ownership (Padmahabhan & Cho, 1999) while other state that it leads to use of JVs (Agarwal,
1994). We adopt the view that EMFs when entering culturally distant countries need to learn
how to do business there, that is why they prefer to cooperate with local partner who is more
aware about tacit elements of culture.
Hypothesis 6. The larger the size of Russian diaspora in a host country, the more likely a
Russian firm will opt for lower ownership stake.
Building on data on Chinese outward FDI, Buckley and Casson (2009) stated that,
diaspora contributed to the integration of China into the world economy. They state that personal
relationships and social connections across countries positively influence business dealings and
patterns of institutionalization. They argued that family networks and ethnic ties represent firmspecific advantage for emerging-market firms due to reduction of business risk and transaction
costs associated with spotting business opportunities in other countries. This ethic closeness
simplifies communications and encourages any form of cooperation with foreign firm.
According to the recent report published by Migration policy institute of the United
Nations, Russian diaspora abroad is the third largest in the world, following India and Mexico
and exceeding Chinese diaspora. Majority of people moved to former republics of the Soviet
Union and did not contemplate that once they would become a part of Russian diaspora in
foreign countries. So, in our case it is suggested that firms would firstly invest in countries with
large resident population of ethnic Russians. Such countries are mostly classified as emerging.
On the contrary, Russian diaspora in developed countries is almost negligible and will, have no
35
impact on ownership strategies of Russian companies abroad. Thus, greater Russian diaspora in
a host emerging market will positively relate to ownership strategies of Russian firms in
emerging host market, but will have no impact on ownership strategies in a developed host
market.
Hypothesis 6 a. The larger the size of Russian diaspora in a host emerging country, the
more likely a Russian firm will opt for lower ownership stake.
Hypothesis 6 b. Size of Russian diaspora in a host developed country will not impact
ownership-related decisions of a Russian firm.
Cultural distance is key variable in entry mode decisions of companies, however, such
aspect of culture as linguistic distance has been largely ignored by international business
scholars with the exception of only few studies (Demirbag et al., 2007; Dow & Karunaratna,
2006). Linguistic distance is recognized as a complement, or even dominant to cultural distance,
especially, in business transaction of emerging market firms. Linguistic differences also
influence observed dissimilarities in managerial values between countries (West & Graham,
2004). Linguistic and genetic relationships amongst 130 nations were clustered by Chen, Sokal
and Ruhlen (1995) and these clustering results in familiarity with host country market. Welch et
al. (2001) proved that during the initial stage of internationalization firms remain within their
language group. Psychic and linguistic proximity is prerequisite for understanding host
environment (Nordstrom & Vahlne, 1994) and bilateral trade (Disdier & Mayer, 2006), so this
logic is applicable for operations of MNCs.
Following this argument, Gomes-Casseres (1990) provided evidence for strong
interrelation between familiarity with host environment and establishment of joint ventures. It is
believed that linguistic proximity results in better cooperation with local partner. It also
encourages trust, which, in turn, reduces the need for formal control, providing means for social
control (Sohn, 1994). Beamish provided example of firms from Taiwan which preferred joint
ventures in China than Western counterparts due to ethically closeness. Effect of risk perception
of managers on entry modes is influenced by linguistic distance, while there are no reasons to
suggest that linguistic closeness influence ownership stake of internationalizing companies, that
is why we do not include this element of culture in our empirical model.
1.2.3 Normative distance
Normative institutional pillar is embedded in national culture reflecting values, norms,
assumptions and beliefs about human behavior that are shared by all members of the society and
are considered to be acceptable. Prescriptive and evaluative nature of this pillar predetermines
legitimacy of actions evolve through continuous interactions into norms of acceptable behavior.
Normative mechanisms refer to cultural expectations about the behavior of professionals that all
36
actors are compelled to respect in a particular country. (DiMaggio & Powell, 1983). Cultural
expectations of their organizations, upon which actors are dependent, exert pressures in terms of
contract law, financial reporting requirements, norms and rituals of adherence to wider
institutions. Normative isomorphism is reached when firms demonstrate behavior that is
considered socially appropriate in the environment. It is suggested that in markets where
regulatory environment is weak, informal constraints such as values, norms of behavior and
attitudes come into play (North, 1990).
LOF increases with the growth of institutional distance between home and host country,
forcing company to be more locally responsive to host-country institutions. But the most
influential pillar for global integration is normative as it explains difficulties of transferring
MNE’s practices to host country (Xu & Shenkar, 2002).
Big normative institutional distance makes difficult for a company to obtain external
legitimacy and to effectively transfer MNE’s practices. That is why foreign companies in this
case would prefer to enter the joint project with local partner to offset the unfamiliarity hazards.
The same logic works in case of increasing cognitive institutional distance arising from
consumer ethnocentrism. Unfavorable perception of and stereotyping against foreign firms result
in higher discriminatory hazards. They can be attenuated with the help of a local partner which is
respected and supported by locals but still does not share ethnocentrism. Another option for a big
firm can be taking advantage of its financial strength, brand recognition, bargaining power and
so establishing wholly owned subsidiaries, but it can be risky as in countries with high
ethnocentrism, where consumers are more prone to react to such a move.
Hypothesis 7. The larger the normative distance between Russia and a host market, the
more likely a Russian firm will opt for lower ownership stake.
Cultural distance results in a challenge to obtaining social legitimacy. Firms need to
comprehend mental maps of the host environment in order to conform to it (Hofstede, 2001).
Cultural distance leads to increase in costs related to transfer of information, knowledge, skills
and systems across borders. Cultural similarity simplifies communications and problem solving.
However, there is a phenomenon that small to medium cultural distance results in fewer
interaction problems than in case of culturally similar actors (Ghemawat, 2003). It can be
explained by the fact that when managers have to work with people originating from culturally
distant environments, they are aware of the differences and adjust their behaviors accordingly
that results in more effective communications. Conversely, cultural similarities can lead to
negligence and behaviors are taken for granted.
Emerging markets are characterized by prevalence of informal mechanisms, that is why
EMFs may be reluctant to invest heavily in sophisticated host country markets that are culturally
37
less distant (other emerging markets).
It can be very difficult to interact with legitimizing actors in case of larger cultural
distance when substantial differences arise due to lack of understanding about values, norms,
assumptions which provide grounds for individual and organizational behavior.
EMFs are prone to expect cultural constraints in developed countries due to larger
cultural distance in comparison with other emerging markets. However, there is also substantial
diversity of cultural values across emerging markets (Khanna et al., 2005). So, EMFs need to
account for this diversity and work out appropriate behaviors when entering other emerging
markets. At the same time, it is easier to get access to the information regarding potential cultural
constraints in developed markets. Coupled with the argument that EMFs tend to anticipate and
appreciate cultural dissimilarities between them and developed host markets, we come up with
the following hypothesis.
Hypothesis 7 a. The negative relationship between normative distance between Russian
and a host market and the likelihood of higher ownership stake is stronger in emerging markets
than in developed host markets.
1.2.4 Control factors
Market attractiveness
The potential of a destination country is determinant of firm’s decision on market
selection and choice of market entry strategy. It is believed that firms prefer to enter markets
with high potential by establishing their wholly-owned subsidiaries as they allow for generating
higher profits in long-term perspective (Taylor et al., 1998). Markets of higher size can absorb
additional capacity and thus enhance firm’s efficiency. Furthermore, firms in such markets opt
for vertical integration to gain economies of scale and achieve long-tern market presence
(Agarwal & Ramaswami, 1992). Higher resource commitment is positively related to
internalization (Davidson & McFetridge, 1985). The need for internalization is also caused by
the higher potential risk associated with shirking in attractive markets (Gromes-Casseres, 1990).
Based on the assumption that the higher share of costs is fixed, firm can gain higher profits in
large host country market due to economies of scale (Agarwal & Ramaswami, 1992).
Hypothesis 8. The larger the market size of a host market, the more likely a Russian firm
will opt for higher ownership stake.
Viable economy and high available incomes are crucial for growth of business activity.
Firms pursuing growth opportunities and market-seeking motives select large consumer market
with growing market volume. Such markets become even more appealing if they are still
relatively unsaturated, show high demand for foreign products, and population there is quite
concentrated. So, host market economy is a determinant firms' expansion into these markets.
38
Countries with strong economic development are usually characterized by high level of political
and economic stability. (Hermann & Datt, 2002). This is especially true for developed markets,
so we believe that firms will commit more resources and deploy higher ownership modes in such
market rather than emerging markets which are usually pose more risk.
Hypothesis 8 a. The positive relationship between host market size and the likelihood of
adoption higher ownership strategy will be stronger in a developed, rather than in an emerging
host market.
Geographical distance
Geographical distance appears to be one of the most important measures of psychic
distance. Many IB scholars have shown that it is positively relates to measurement of psychic
distance (Johanson & Wiederscheim-Paul, 1975; Dow & Karunaratna, 1998; Brewer et al.,
2007). Despite the process of globalization and related process of decreasing distances, it is still
a factor which influences firm’s internationalization decisions. Larger geographical distances
increase uncertainty and decreases speed of communication, and leads to delays, inaccuracies,
confusion of information flows (Dow & Karunaratna, 2006). Thus, we state that
Hypothesis 9. The larger the geographical distance between Russia and a host market,
either emerging or developed, the more likely a Russian firm will opt for higher ownership stake.
In this chapter we come up with hypotheses regarding regulative, cognitive and
normative distance between home and host country as well as control (moderating) variables.
We also hypothesize that different institutional factors are critical for selection of ownership
strategies of Russian companies in developed and emerging economies.
39
2 METHODOLOGY
2.1 Sample
The study is based on the Zephyr Bureau Van Dijk Database which contains information
about more than 500 000 corporate deals all over the world on mergers and acquisitions, IPO,
private equity, leveraged buyouts, management buyouts etc. The data on international corporate
deals of Russian companies for the last 10 years was exported. The time period of 2006-2015
was chosen, first of all, in order to generate representative dataset and perform reliable statistical
analysis. The second reason is that this particular period is characterized by the largest FDI
outflows from Russia.
100000
80000
60000
40000
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
20000
Figure 5 Foreign direct investment of Russia: Outward flows, annual, 1992-2014, mln US
dollars
Source: UNCTAD FDI statistics2
The database provides information about target company and country of destination,
acquirer, vendor, deal type, stake, date the deal was completed or assumed completed and deal
value. Appendix 1 presents example of information available about international corporate deals
of Russian companies.
Table below presents the description of our dataset. The dataset comprised for the
purpose of this research initially contained information about 1311 international deals of Russian
enterprises, but then, in line with other scholars, we excluded all the deals which were completed
in countries of destinations classified as “offshore zone” for Russian companies. Thus, we
obtained 1021 deals in 78 countries, 545 of which were conducted in developed countries while
476 in emerging countries. Approximately half of the deals are comprised of establishment of
2
United Nations Conference on Trade and Development. (2015). World Investment Report 2015 [Data file].
Retrieved from http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf
40
wholly-owned subsidiaries, minority stake acquisitions are the second largest category, joint
ventures are the third and there were only several mergers undertaken by Russian companies.
Table 2 Dataset description
Mode of entry
Developed economies
Emerging Economies
Total
Acquisition
232
277
509
Joint venture
34
98
132
Merger
2
1
3
Minority stake
277
100
377
Total
545
476
1021
Source: created by the author
The diagram illustrates that there were more acquisitions conducted in emerging
countries than in developed as well as joint ventures established. Moreover, Russian companies
more frequently acquire minority stakes in developed countries rather than in emerging.
600
500
400
Minority stake
300
Merger
Joint venture
200
Acquisition
100
0
Developed economies
Emerging Economies
Figure 6 Number of corporate deals of Russian companies abroad
Source: created by the author
2.2 Model and measures
2.2.1 Models
We construct three models in order to identify how institutional distance influences
ownership strategies of Russian firms in their corporate deals in the process of
internationalization. To examine the relationships affecting the degree of ownership we conduct
a multiple linear regression analysis, as the dependent variable is a continuous variable.
Model 1 covers all the deals and can be represented as follows:
41
Yi = β0 + β1Economy_dummyi + β2ln(GDP)i + β3ln(Geographical distance)i +
β4Economic Freedomi + β5Political stabilityi + β6Doing businessi + β7International
organizationsi + β8Corruption i + β9Diaspora i + β10CD i + εi,
where Yi – degree of ownership of Russian firm; i = 1, 2,…1021 – corporate deal; βn –
explanatory variables; n – number of variables.
Explanatory variables are presented in table 3.
Further we divide the sample into two parts in order to capture differences of factors
affecting degree of ownership of Russian firm separately in emerging and developed countries.
Two separate equations are introduced for sample incorporating deals of Russian firms in
emerging markets and developed markets: model 2 and 3, respectively.
Model 2:
Yi = β0 + β1ln(GDP)I + β2ln(Geographical distance)
i
+ β3Economic Freedomi +
β4Political stabilityi + β5Doing businessi + β6International organizationsi + β7Corruptioni +
β8Diasporai + β9CD i +εi;
Model 3:
Yi = β0 + β1ln(GDP)I + β2ln(Geographical distance)
i
+β3Economic Freedom
i
+
+β4Political stability i +β5Doing business i +β6International organizations i +β7Corruption
i
+β8Diaspora i +β9CD i + εi.
2.2.2 Dependent variables
In order to test the hypotheses, we input ownership equity stake as a dependent variable.
Each ownership strategy is characterized by particular level of control, resource
commitment, dissemination of risk and flexibility (Driscill & Paliwoda, 1997). However,
external variables, which we examine in this study, influence ownership strategy based primarily
on the level of resource commitment (Hill, Hwang & Kim, 1990). For the purpose of this study
we input a dependent variable aimed at defining the level of resource commitment of the firm
measured as the percentage of equity ownership the company. A minimum equity stake equals to
1%. The ownership strategy ranges as follow: 1-20% - low ownership strategy; 21-50% medium internship strategy; 51-100% - high ownership strategy. We use equity participation as a
continuous variable, thus, allowing for fine-grained distinctions between factors influencing 20percent equity stake and those influencing 80-percent equity stake (Chen & Hennart, 2004).
2.2.3 Independent variables
Regulatory distance
42
Regulatory distance between Russia and destination country is measured by the
calculation of distance in Economic Freedom index, Doing business index, Corruption
perception, membership in the international organizations.
Economic freedom reflects fundamental rights of individuals for property and labor. In
developed countries people are free to work, produce, consume and invest. Moreover, the
principle of free movement of labor, capital and goods/services. It is well-known that poverty,
sickness and ignorance are decreased with economic prosperity. The Index of Economic
Freedom documents economic freedom of countries based on 10 qualitative and quantitative
characteristics combined in 4 main pillars: rule of law (property rights, freedom from
corruption); limited government (fiscal freedom, government spending); regulatory efficiency
(business freedom, labor freedom, monetary freedom). Each of the freedoms graded from 0 to
100, the average score with equal weights to all dimensions is calculated to identify overall score
for the country.
Regulatory distance can be also measured by distance in Doing Business index which is
comprised every year. Every country takes a relative position in rating comprised of 189 places.
The higher the position of the country in this rating, the more favorable the conditions for
starting up an enterprise and its functioning. The ranking is calculated based on aggregate
evaluation of the following indicators:
•
launch of an enterprise;
•
gain of permission for construction;
•
obtainment of electricity;
•
registration of property;
•
getting loan;
•
protection of minority investors;
•
payment of taxes;
•
trading across borders;
•
enforcement of contracts;
•
resolution of insolvency.
The rating embraces enormous dataset of economic data from 2003 to the present days.
For the purpose of this study we account for membership of Russian a host country in the
following international political and economic organizations: Union State, Commonwealth of
Independent States, Collective Security Treaty Organization, Organization for Security and
Cooperation in Europe, Organization of the Black Sea Economic Cooperation, Council of
Europe, G-20, BRICS, Asia-Pacific Economic Cooperation, Shanghai Cooperation Organization,
Eurasian Economic Community.
43
Political stability indicator and Absence of Violence and Terrorism reflect the views on
likelihood of political instability or politically-motivated violence, including terrorism. Political
stability indicator is taken from World Governance Indicators dataset. This is a research dataset
that summarizes the perception of the quality of governance of large number of enterprises,
citizen and expert survey respondents in developed and developing countries. The data are
derived from survey institutes, non-governmental organizations, private sector firms (Kaufman
et al, 2010).
Public sector corruption is a challenge for entering firm which is not familiar it how this
corruption works. That is why the entering firm will likely prefer to establish relationships with
incumbent firms which are aware of the extent to which corruption is considered common and
whether it is effective or not (Rodriguez et al., 2005).
The Corruption Perception Index is a global research on rating of countries, which
assesses indicators of diffusion of corruption in public sector. Its calculated based on
methodology of independent international organization Transparency International
Cognitive distance
A crucial variable that characterizes cultural relations between countries is the size of
Russian diaspora in the host country. So, we insert absolute number of people living in country
of destination based on data derived from Migration Policy Institute of the United Nations.
Normative distance
The differences in norms are very difficult to capture. Hofstede introduced the most
illustrating index in 1980. Since that time no reliable measure of normative distance appeared.
The following dimensions of the index are relevant to this study as they capture expected
social behavior of people:
•
Power Distance: depicts the attitude of people to other people with higher or
lower social position;
•
Individualism/Collectivism describes whether or not people are prone to act in a
group and in favor of them;
•
Masculinity/Femininity illustrates the status of values associated with female or
male role models;
•
Uncertainty avoidance reflects people’s attitude to unusual situations. In some
cultures, people adhere to strict rules and laws and feel uncomfortable themselves in unusual
situations while in other they are relativists, have few rules and feel at ease in unstructured
situations.
Kogut and Singh (1988) suggested formula to measure distance between countries based
on Hofstede’s dimensions:
44
CDj =
!!" !!!!
!
!!!
!!
!
/4,
where: CDj – Cultural distance between home country and country j;
Iij – Index of cultural dimension I n country j;
Vi – Index variance of dimension I;
H – Home country.
2.2.4 Control variables
As pointed out in the literature, control variables are needed to account for important
effects on internationalization decisions (Coeurderoy & Murray, 2008). Numerous scholars
incorporate control variables in their analysis of entry mode decisions (Chan & Makino, 2007;
Javorcik & Wei, 2009).
In this study we include factors which are distinct from institutional distance, but are
closely linked to the decision of the firm to invest abroad. First, we include different dimensions
of distance which have an impact on decision-making. Geographic distance is measured by
distance between Moscow and capital city of the destination country (Slangen & Beugelsdijk,
2010). Second, variable to control market potential is included in line with the existing studies of
entry modes in different countries (Tsang & Yip, 2007).
Market potential is captured by
absolute value of GDP of country of origin.
The summary of methodology is presented in the table below.
Table 3 Measures
Dependent variable
Measure
Source
Ownership strategy
% equity stake ownership
Bureau Van Dijk
Control variables
Economic distance
Natural logarithm of GDP World Bank Database
of destination country
Geographic distance
Natural
distance
logarithm
between
http://www.worldbank.org
of http://www.distancefromto.net
capital
cities
Independent variable
Measure
Source
Regulatory distance
Economy classification
Dummy: 1 – developed OECD
45
economy; 2 – emerging
https://www.oecd.org
economy
Difference
in Doing Business index
World Bank Group
conditions for starting
http://www.doingbusiness.org
up the business
Distance in Political Political
stability
and World
stability and Absence Absence
of Terrorism/Violence
Terrorism/Violence index
Governance
Indicators
of http://info.worldbank.org/governance/w
gi/index.aspx
Distance in Economic Index of Economic Freedom Heritage Foundation
Freedom
http://www.heritage.org/index/
Corruption
Corruption Perception Index Transparency
International
http://www.transparency.org
Membership
international
and
in Absolute scale
political
economic
organizations
Normative distance
Сultural distance
Hofstede index
The Hofstede centre
https://www.geert-hofstede.com
Cognitive distance
Size
diaspora
of
Russian Natural logarithm of the Migration Policy Institute of the United
number of Russian living in Nations
destination country
http://www.migrationpolicy.org
Source: created by the author
46
3 EMPIRICAL RESULTS
Model one is estimated with ownership stake as a dependent variable. We performed
multiple regression analysis to test the hypothesis stated in Chapter 2. Table 4 presents the
results for model 1. F-statistics and p-value show (F = 17,267, p-value = 0,000) that the model is
statistically significant.
Table 4 Model 1. ANOVA
Model
Sum of Squares
df
Mean square
F
Sig.
1
Regression
279075,320
10
27907,532
17,267
0,000b
Residual
1218612,777
754
1616,197
Total
1497688,097
764
Source: created by the author in SPSS
R in table 5 shows that the model explains 43,2% of variation in the dependent variable.
Durbin-Watson statistic can in the range from 0 to 4. Durbin-Watson close to 2 can indicate that
the model is significant and can be used for explaining variation in dependent variable; in this
case it equals to 1,727.
Table 5 Model 1. Summary
Model R
1
R Square Adjusted R Square
0,432a 0,186
0,176
Std. Error of the Estimate
Durbin-Watson
40,201956628407050
1,727
Source: created by the author in SPSS
In order to identify the potential problem of multicollinearity, VIF-test is performed. VIF
values greater than 10 can indicate a problem of multicollinearity. In our model, the values
obtained are within the acceptable limits.
Table 6 presents results for model 1. Dummy variable standing for economy
classification (1 – developed economy, 0 – emerging economy) appears to have significant
impact on ownership strategies of Russian firms. In particular, β=15,326 that indicates that
higher ownership strategy is pursued by Russian firms in developed countries. As for control
variables, the table shows that GDP is significant for ownership strategy, but the relationship is
negative. It means that the firm chooses modes of entry requiring low resource commitment to
countries with high market potential. This can be explained by the argument that Russian firms
strive to enter attractive markets by acquiring minor stakes in order to gain external legitimacy
with the help of local partners. Geographic distance appears to be insignificant for ownership
strategy of Russian firms. That contradicts other studies (Harzing, 2003), which state that as the
geographic distance increases, firms need greater control over foreign operations.
47
Regulatory distance is represented by distance in several dimensions. Distance in
Economic Freedom is also a significant factor (p < 0,05), however, the relationship of this
variable with ownership strategies of Russian companies is negative (β = - 1,170) that indicates
that H1 is to be rejected. Significance of distance in Political stability index between Russia and a
host market (p < 0, 05; β=0,280) supports H2. Another important aspect of regulatory pillar is the
level of corruption. The negative correlation of distance in Doing business with ownership
strategy of a Russian firm indicates that H3 is true. Distance in Corruption perception,
notwithstanding findings of other scholars in international business (Di Guardo et al., 2016) is
found to be insignificant (p > 0,05) for ownership strategies of Russian firms abroad, so we have
to reject H4.
Membership in the larger number of the same international organizations is a prerequisite
for choosing higher ownership strategy for Russian firms (p<0,05; β=4,783), so H5 is supported.
As for cognitive distance, we have operationalized it by the size of Russian diaspora in a
host market. Size of Russian Diaspora appears to be significant (p<0,05), however, it is
negatively related to ownership strategy (β=-3,469), thus supporting H6.
Moreover, there is negative significant relationship between normative distance and
ownership strategy of a Russian firm. So, as the value of Kogut-Singh cultural distance index
increases, the more likelihood that the firm will prefer modes of entry with lower commitment.
β-coefficient = -5,068 suggests that H3 that claims that the higher the normative distance, the
more likely the firm will opt for lower ownership strategy is supported.
Table 6 Model 1. Coefficients
Unstandardized
Standardized
Coefficients
Coefficients
B
Std. Error
Beta
(Constant)
249,528
27,838
Economy_dummy
15,326
6,673
,161
-5,999
1,801
-,271
,396
3,647
,008
-1,170
0,475
-,292
0,280
0,105
,143
-0,124
0,061
-0,154
Model
ln (GDP)
1
ln (Geographic distance)
Economic Freedom
Political stability
Doing business index distance
т
Sig. VIF
8,964 ,000
2,297 0,022 4,718
3,331
0,001 6,138
0,109 0,914 4,934
2,465
0,014 5,979
2,682 0,007 2,622
2,013
0,044 5,391
48
Corruption perception index
distance
Membership in int org
ln (Russian Diaspora)
Cultural distance
0,155
0,208
0,077
0,744 0,457 5,816
4,783
1,878
0,118
2,546 0,011 1,975
-3,469
0,881
-0,185
-5,068
1,585
-0,212
3,939
3,197
0,000 2,045
0,001 4,080
Source: created by the author in SPSS
In order to identify what factors, in particular, affect decision of a Russian firm to
increase or decrease ownership stake, we divide our dataset according to the classification and
perform separate regression analysis.
Institutional factors influencing ownership strategies in Emerging economies
Based on the results presented above, we run regression analysis for emerging countries
and developed countries separately. The table below shows that the model on ownership stake of
Russian companies in emerging countries is statistically significant (F = 3,002, p-value <0,05).
In total, there are 261 observations.
Table 7 Model 2 ANOVA
Model
Sum of Squares
df
Mean square
F
Sig.
2
Regression
45216,110
9
5024,012
3,002
0,002b
Residual
379887,625
227
1673,514
Total
425103,734
236
Source: created by the author in SPSS
The coefficient of determination (R) illustrates that independent variables inserted
explain 32,6% of variation in ownership stake of Russian companies in emerging countries.
Table 8 Model 2. Summary
Model R
2
R Square Adjusted R Square
0,326a 0,106
0,071
Std. Error of the Estimate
Durbin-Watson
40,908602583156270
1,951
Source: created by the author in SPSS
In case of emerging countries, in line with findings of the first model, GDP has negative
relationship (β = - 15,468) with ownership strategy of Russian firms, while geographic distance
has no impact on ownership-related decisions.
Regarding regulatory dimension, only two measures are significant for ownership
strategies of Russian firms in corporate deals of Russian firms in emerging markets: distance in
49
Doing business (β = - 0,187) and membership of Russia and a target emerging market in a larger
number of the same international organizations (β = 12,108), thus supporting H3a and H5a. We
also find support for H2a, which states that distance in Political stability does not influence
decisions of Russian firms regarding their ownership strategies abroad. At the same time,
distance in Economic Freedom appears to be insignificant, so we can neither support, nor reject
H1a. In contradiction with H6a, size of Russian diaspora does not impact ownership-related
decisions of Russian firms, neither does normative distance.
Table 9 Model 2. Coefficients
Model
2 (Constant)
ln (GDP)
ln (Geographic distance)
Economic Freedom
Political stability
Corruption perception index
distance
Membership in int org
Doing business index distance
ln (Russian Diaspora)
Cultural distance
Unstandardized
Standardized
Coefficients
Coefficients
B
Std. Error
Beta
317,208
123,079
-15,468
5,323
-0,505
18,915
10,461
0,436
-0,550
1,423
-0,066
0,148
0,223
-,055
-1,643
1,409
-0,271
12,108
5,659
0,350
-0,187
0,116
-0,140
-0,030
2,933
-0,002
1,835
6,128
0,039
Sig. VIF
т.
2,577 0,011
2,906
0,004 7,680
1,808 0,072 4,784
0,386
0,700 4,317
0,661 0,509 1,756
1,166
0,245 3,773
2,139 0,033 6,794
1,611
0,010
0,044 1,913
0,992 5,533
0,300 0,765 4,292
Source: created by the author in SPSS
Institutional factors influencing ownership strategies in Developed Economies
The dataset on internationalization of Russian companies in developed countries is
comprised of 527 observations. The linear regression model is significant (F=15,990, p <0,05).
Table 10 Model 3. ANOVA
Model
Sum of Squares
df
Mean square
F
Sig.
3
Regression
226700,141
9
25188,905
15,990
,000b
Residual
816017,681
518
1575,324
50
Total
1042717,822
527
Source: created by the author in SPSS
The model summary indicates that 46,6% of variation in ownership stake of Russian
companies is explained by input predictors.
Table 11 Model 3. Summary
Model R
3
R Square Adjusted R Square
0,466a 0,217
0,204
Std. Error of the Estimate
Durbin-Watson
39,690347810124460
1,610
Source: created by the author in SPSS
Results on the model constructed for developed economies are substantially dissimilar to
the findings regarding ownership strategies of Russian companies in emerging countries. First of
all, GDP is insignificant for ownership strategy of a Russian firm as well as geographical
distance. We also find evidence for partial rejecting H1a as there is negative correlation between
distance in Economic Freedom (β = - 1,140) and ownership stakes of Russian firms. At the same
time, we prove that political stability is positively correlated with ownership stake of Russian
firms in developed markets, thus, H2a gains evidence. Distance in corruption, in line with both
models described earlier, does not impact ownership strategies of Russian firms, so we support
H4b. Membership in the same organizations, notwithstanding our expectations, is also substantial
predetermining of acquiring higher ownership stake (β = 5,768) by Russian firms. Size of
Russian Diaspora in host developed markets is highly negatively correlated with ownership
strategies of Russian firms, so we have to reject H6b. In case of internationalization of Russian
firms into developed markets, normative distance matters (p-value <0,05β = -7,332).
Table 12 Model 3. Coefficients
Unstandardized
Standardized
Coefficients
Coefficients
B
Std. Error
Beta
238,387
29,465
-3,603
2,123
-0,160
-5,394
4,653
-0,093
Economic Freedom
-1,140
0,656
-0,151
1,738 0,046 4,317
Political stability
0,262
0,135
0,094
1,938 0,043 1,549
Model
3 (Constant)
ln (GDP)
ln (Geographic distance)
Sig. VIF
т
8,091 0,000
1,697
1,159
0,090 5,901
0,247 4,237
51
Doing business index distance
Corruption perception index
distance
Membership in int org
ln (Russian Diaspora)
Cultural distance
-
-0,044
0,075
-0,031
0,116
0,216
0,038
,539 0,590 3,260
5,768
2,409
0,116
2,394 0,017 1,555
-4,934
1,736
-0,165
-7,332
1,874
-0,250
0,582
2,843
3,913
0,561 1,880
0,005 2,229
0,000 2,708
Source: created by the author in SPSS
Table 13 Results of hypotheses testing
Hypotheses
Supported
rejected
(+)
(-),
or
neither
rejected or supported
(0)
Hypothesis 1. The larger the distance in Economic Freedom between Russia and a host market, the more likely a Russian firm will opt for
higher ownership stake.
Hypotheses 1 a. The positive relationship between distance in -/0
Economic Freedom between Russia and a host market and the
likelihood of adoption of higher ownership strategy is stronger in
developed host markets than in emerging.
Hypothesis 2. The larger the distance in political stability between +
Russia and a host market, the more likely a Russian firm will opt for
higher ownership stake.
Hypothesis 2 a. The larger the distance in political stability between +
Russia and a developed host market, the more likely a Russian firm
will opt for higher ownership stake.
Hypothesis 2 b. The distance in political stability between Russia and +
an emerging host market will not impact ownership-related decisions
of Russian firms.
Hypothesis 3. The larger the distance in Doing business between +
Russia and a host market, the more likely a Russian firm will opt for
lower ownership stake.
52
Hypothesis 3 a. The larger the distance in Doing business between +
Russia and an emerging host market, the more likely a Russian firm
will opt for lower ownership stake.
Hypothesis 3 b. The distance in Doing business between Russian and a +
host developed market will not impact ownership-related decisions of
Russian firms.
Hypothesis 4.
The larger the distance in the level of corruption 0
between Russia and a host market, the more likely a Russian firm will
opt for lower ownership stake.
Hypothesis 4 a. The larger the distance in the level of corruption 0
between Russia and a host emerging market, the more likely a Russian
firm will opt for lower ownership stake.
Hypothesis 4 b. The distance in the level of corruption between 0
Russian and a host developed market will not impact ownershiprelated decisions of Russian firms.
Hypothesis 5. The more the number of international organizations in +
which Russia and a target host market have membership, the more
likely that a Russian firm will opt for higher ownership stake.
Hypothesis 5 a. Membership of Russia and a target emerging market in +
the larger number of the same international organizations will have
positive relationship with Russian firm’s ownership strategy.
Hypothesis 5 b. Membership of Russia and a target developed market in the larger number of the same international organizations will not
impact ownership-related decisions of a Russian firm.
Hypothesis 6. The larger the size of Russian diaspora in a host country, +
the more likely a Russian firm will opt for lower ownership stake.
Hypothesis 6 a. The larger the size of Russian diaspora in a host 0
emerging country, the more likely a Russian firm will opt for lower
ownership stake.
Hypothesis 6 b. Size of Russian diaspora in a host developed country will not impact ownership-related decisions of a Russian firm.
Hypothesis 7. The larger the normative distance between Russia and a +
host market, the more likely a Russian firm will opt for lower
ownership stake.
53
Hypothesis 7 a. The negative relationship between normative distance +between Russian and a host market and the likelihood of higher
ownership stake is stronger in emerging markets than in developed
host markets.
Hypothesis 8. The larger the market size of a host market, the more likely a Russian firm will opt for higher ownership stake.
Hypothesis 8 a. The positive relationship between host market size and the likelihood of adoption higher ownership strategy will be stronger
in a developed, rather than in an emerging host market.
Hypothesis 9. The larger the geographical distance between Russia and 0
a host market, either emerging or developed, the more likely a Russian
firm will opt for higher ownership stake.
Source: created by the author
Testing assumptions
In order to identify whether multiple regression is an appropriate model for explaining
our data, each model has been tested on satisfying 6 assumptions:
•
Our dependent variable (ownership stake) is measured at a continuous scale (from
0 to 100 in our case);
•
we input more than two independent variables, which are either continuous or
categorical;
•
each time we perform Durbin-Watson statistics in order to show the independence
of observations (the value are bounded between 0 and 4);
•
we test whether there is a liner relationship between each independent variable
and dependent variable by visually inspecting scatterplots; the relationship is linear in each case;
•
we test our models for homoscedasticity by constructing normal standardized
residual plots, in particular histogram and normal probability plot which provide evidence that
the variances along the line of best fit remain similar as we move along the line;
•
our data do not show multicollinearity which occurs when two or mode
independent variables are highly correlated to each other. We excluded all variables that showed
VIF value more than 10 in order to avoid problems with understanding which independent
variable contributes to the variance explained in the dependent variable;
•
we delete significant outliers, high leverage points and highly influential points in
order not to affect the regression equation in negative way and increase predictive accuracy of
our results as well as statistical significance;
•
we used a histogram and normal P-P plot in order to check that residuals are
54
approximately normally distributed.
We run all the tests described above and managed to prove that our data can be analyzed
using multiple regression and obtain valid results.
The coefficients of the control variables suggest the contradictory results to the ones
presented in Model 1. Geographic distance has significant and positive relationship with
ownership stake of the company. It actually supports the conclusions of the scholars mentioned
above. At the same time, GDP is not significant for the company when managers make decisions
on the acquisition of the particular equity stake in foreign firm.
In this model another dimension of regulatory distance is significant: Economic freedom.
It is positively related to the company’s decision on percentage of ownership in the foreign firm.
It can be explained by the logic that if the owners feel confident about rule enforcement,
regulatory efficiency, fiscal regulations in host market, the will dedicate more investments to the
country where the rights of the investors are fully protected. As for cultural dimensions, amount
of Russian population is significant and positively related to the dependent variable. It means
that if there are cultural links with host country, the acquirer would tend to possess higher stake
in host market’ firms.
To sum up, we have tested our hypotheses stated in the first chapter with the use of
multiple regression analysis. We have checked the adherence of the model to the main statistical
assumptions. We have also come up with separate multiple regression models for developed and
emerging economies in order to identify what factors, specifically, influence ownership
strategies of Russian companies.
55
Discussion
The aim of this research to analyze the influence of institutional distance between home
and host country environment on ownership strategies of Russian companies. Specifically, we
examine several dimensions of institutional distance: regulatory, normative and cognitive
distance. We contribute to the existing studies in international business by conducting
quantitative research.
The formal regulations are explicitly codified making them easy to find and interpret, so
the company can gain legitimacy by following rule of law in the host market. If the regulatory
distance is positive, it means that regulations are more developed in host market and managers
feel confident about the protection of the rights and freedom. Our findings suggest that if we
ground our analysis on all corporate deals of Russian firms, conducted for the period being
examined, all the dimensions of regulatory pillar introduced – distance in Economic Freedom,
Ease of Doing Business, Political stability, membership in international organizations – are
significant, but we aim to identify which of these distances, in particular, are more important
when Russian firms enter emerging and developed countries. First of all, distance in Economic
Freedom is negatively correlated with ownership stake acquired by a Russian firm. Moreover, it
is also negative in case of internationalization into developed economies, while it is insignificant
for ownership-related decisions of Russian firms in emerging markets. These results contradict
our initial research hypotheses. We expected that in developed markets firms will take a chance
to develop their accounting standards and, thus, being listed in stock exchange, attract more
investments into the firm. Also we argued that it would be difficult to adopt advanced
managerial practices of foreign firms in developed countries. Instead, our findings go in line with
arguments of Luo and Tung (2007) who argue that EMFs, lacking experience of doing business
in less restrictive environments, prefer lower ownership strategies there. Furthermore, we
hypothesized that capabilities of Russian firms of coping with more restrictive and unpredictable
environment in home market will be a competitive advantage for them in other emerging
countries. However, we can neither support, nor reject this hypothesis as distance in Economic
Freedom with other emerging markets is not significant for ownership-related decisions of
Russian firms.
In line with argumentation of Kotabe (2005), we provide evidence that distance in
political stability is positively related to ownership stakes of Russian firms in all markets, but it
is mostly driven by significance of this factor in case of developed markets. We prove that, first
of all, Russian firms are ready to commit more resources if they enter politically stable countries.
Furthermore, we argue that distance in political stability have no influence of ownership-related
56
decisions of Russian firms. If they successfully operate in the home environment characterized
by high level of uncertainty, institutional constraints in other markets will present no challenge
for them.
One of the findings that should be highlighted is that the measure we have introduced for
examining the influence of political and economic integration appears to be not only significant,
but also has major impact on ownership strategies of Russian firms, both in emerging and
developed countries. Membership of Russia and a destination country in the larger number of the
same international organizations is a prerequisite for acquiring larger ownership stake in a
foreign firm by Russian investors, the effect is stronger in deals conducted in emerging markets
(β=12,108), rather than developed (β=5,768), though. Apart from this measure of regulatory
distance, distance in Ease of Doing Business is also significant. Out of all dimensions we have
introduced for regulatory pillar (Economic Freedom, Political stability), conditions for starting
and developing business are critical for Russian firms entering emerging markets. So, if business
regulations and constraints in a target emerging country are similar to those in Russian, then it is
easier for Russian firms to comply with them.
Inconsistent with the hypotheses postulated, distance in corruption perception has no
influence on ownership strategies of Russian firm, either in developed or emerging countries. It
can be explained by the argument that facing arbitrary and pervasive corruption at home,
Russian firms can overcome challenges posed by it in other emerging countries whereas in
developed countries where corruption is less diffusive, firms can gain legitimacy via compliance
with formal regulations. So, Russian firms are not prevented from internationalizing having to
deal with different level of corruption.
As for cognitive pillar, based on empirical results we claim that the size of Russian
diaspora is negatively correlated with ownership stake, which supports evidence of EMFs
provided, by Luo and Tung (2007). EMFs, including those originating from Russia, are prone
nowadays to preserve their tacit knowledge from culturally distant countries and, thus, conduct
acquisitions. There is decreasing dependence on ethnic ties and size of diaspora community.
Normative distance represents implicit people’ values and norms which are less
understandable for foreigners. This, in turn, inhibits free flow of information and knowledge
between a company and its foreign subsidiaries. In order to overcome this obstacle, companies
prefer to cooperate with local partner who is well familiar with way of doing business in the
country. Thus, in line with many research on the topic, Russian companies prefer lower
ownership stake in case if normative distance is large, it is relevant mostly for ownership-related
decisions of Russian firms in developed countries. We can suggest that this institutional pillar is
not applicable for internationalization of Russian companies in emerging markets. Instead,
57
Eclectic paradigm would best explain that, regardless of normative distance, resource/efficiency-/market-seeking motivations are more important for selection of proper entry modes.
As for control variables, in our major model geographical distance is insignificant while
GDP is negatively correlated with ownership stake of Russian firms, in particular, in emerging
markets. It may be caused by irrelevance of this variable if the firm entries the emerging market
with resource- (rich natural resources, cutting-edge technology) or efficiency-seeking motive
(e.g. lower labor costs).
To summarize, we contribute to the international business research on influence of
institutional distance on ownership strategies of Russian firms by providing evidence that, firstly,
we should take into account different aspects of regulations while internationalizing into
emerging or developed markets (distance in Political stability and Economic Freedom in
developed, distance in Doing Business in emerging). Secondly, we highlight the importance of
economic and political integration as a prerequisite for higher ownership stake. Thirdly,
normative distance matters only in case of entering developed economies. Finally, ownership
strategies are less contingent on ethnic ties, rather on preservation of tacit knowledge and
national culture, resulting in acquisition of higher ownership stakes, especially in developed
countries.
58
Managerial relevance
The insights generated in this research have potential implications for managers. They
enhance understanding of how institutional distance influences ownership strategies of Russian
companies. So, the study provides managers a framework that can be used as a basis for strategic
decisions on internationalization and indicates the importance for managers to consider all pillars
of institutional distance. Managers should consider relative position of home country and host
country when choosing ownership strategy in the process of internationalization.
Our results can be also applied by policymakers in attracting foreign investments. They
should bear in mind that foreign investors will commit more resources to countries with higher
level of regulatory development. Therefore, governments should develop effective legal systems
and stable public institutions, protect rights of foreign investors secure their transactions, thus
encouraging them to invest.
Conclusion
The current study contributes to the institution-based view on ownership strategies of
Russian firms in the process of internationalization. First of all, based on literature review, we
examined the differential effect of regulatory, cognitive and normative distances on Russian
firms’ ownership strategies in foreign countries. Secondly, we came up with a set of relevant
variables for measuring all three pillars of institutional distance. Regulatory distance was
operationalized by distance in Index of Economic Freedom, Ease of Doing Business, Corruption
perception index, Index Political Stability and Absence of Violence. We also argue that in
growing tendency for regional integration membership of home and host country in the same
political and economic international organizations becomes crucial factor for selection of
ownership strategies by internationalizing firms. We measured normative distance by Cultural
Distance formula, suggested by Kogut and Singh (1988). Cognitive distance was captured by
substantially ignored in academic literature measure – size of Russian diaspora in host country.
We provide evidence that factors that influence ownership strategies of Russian
companies in emerging and developed countries differ. In case of developed countries, the main
prerequisite for higher ownership strategy is political stability, economic freedom in destination
country and well as market potential. As for ownership strategies of Russian companies in
emerging countries, the critical factors include similar to home market conditions for doing
business. Membership in the larger number of the same international organization is a
predeterminant for higher ownership stake of Russian firms, either in developed, or emerging
countries. As for cognitive and normative pillars, size of Russian diaspora in a host market as
well as cultural distance, respectively, are negatively correlated with ownership stakes of
Russian firms.
59
Our findings contribute to literature on ownership strategies by demonstrating that
ownership strategies of EMFs in developed and emerging countries have not been accurately
addressed in academic literature. Drawing upon institutional theory, we suggest that ownership
strategies of emerging-market firms should be assessed separately in emerging and developed
countries through all three dimensions of institutional distance: regulatory, cognitive and
normative.
60
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Appendix 1 Extract from research dataset
Target
Ownership
Date
stake (%)
Country
Acquiror
NAUTILUS
MINERALS
INC.
Canada
KHOLDINGOV
AYA
KOMPANIYA
42,5
METALLOINV
EST OAO
RAMBLER
MEDIA LTD
United
Kingdom
PROF-MEDIA
ID ZAO
KLEPP
SPAREBANK
Norway
SOUTH
STREAM
GREECE SA
RAILCONTAINER
LLC
SPG
MINERAÇÃ
O SA
SYMBIOTEC
GMBH
V1
V2
V3
V4
V5
V6
V7
V8
V9
V10
03.11.2006
1
27,9
8,9
25,0
62,0
-75,0
60,0
3,0
3,6
11,3
55,0
15.01.2007
1
28,7
7,8
27,7
46,2
-88,0
61,0
3,0
5,3
10,7
TURRIS AS
5,2
03.01.2008
1
26,9
7,4
18,8
75,1
-96,0
58,0
1,0
3,9
9,8
Greece
GAZPROM
OAO
50,0
13.07.10
1
26,4
7,7
12,4
22,6
-11,0
14,0
1,0
1,0
10,9
China
TSENTR
PO
PEREVOZKE
GRUZOV
V
KONTEINERA 50,0
KH
TRANSKONTE
INER OAO
25.10.10
0
29,4
8,7
0,7
6,1
-31,0
14,0
1,0
3,0
8,0
Brazil
SEVERSTAL
OAO
25,0
11.05.11
0
28,6
9,4
5,8
23,6
4,0
13,3
1,0
0,6
7,4
Germany
INSTITUT
STVOLOVYK
44,0
27.05.11
1
29,0
7,4
21,3
53,8
-101,0 56,0
1,0
3,1
13,9
H
KLETOK
CHELOVEKA
OAO
NETCACAO
SA
France
LIDYANA
ELEKRONIK
HIZMETLER
ITHALAT
Turkey
IHRACAT
PAZARLAM
A
SANAYI
VE TIC AS
SOVEREIGN
METALS
Australia
LTD
CONTARINI
VINI
E
Italy
SPUMANTI
SPA (ITALY)
EVRONE
SRO
Czech
Republic
IVORY COAST
100,0
CACAO
07.02.12
1
28,6
7,8
12,7
43,1
-92,0
43,0
1,0
0,9
11,1
RU-NET LTD
25,0
20.06.12
0
27,4
7,5
12,0
-7,1
-50,0
21,0
2,0
0,5
9,9
ATERRA
CAPITAL
12,6
18.01.13
1
28,1
9,6
31,5
61,1
-102,0 53,0
2,0
4,3
10,1
IGRISTYE
VINA ZAO
100,0
24.04.14
1
28,4
7,8
9,0
45,6
-13,0
16,0
1,0
2,6
11,3
29.09.14
1
26,0
7,4
20,3
63,6
-24,0
24,0
3,0
1,3
10,4
AVTONOMNA
YA
NEKOMMERC
HESKAYA
ORGANIZATSI
YA
AGENTSTVO
7,0
STRATEGICH
ESKHIKH
INITSIATIV
PO
PRODVIZHENI
YU NOVYKH
73
PROEKTOV
SERMILIK
TRAWL APS
MURMANSKII
Denmark
TRALOVYI
33,3
07.05.15
1
26,6
7,4
24,2
61,2
-51,0
62,0
3,0
6,4
8,7
FLOT OAO
Source: created by the author
V1 – Economy_dummy: 1 – Developed economy; 0 – Emerging economy;
V2 – ln(GDP)
V3 – ln (geographical distance)
V4 – Distance in Economic Freedom index
V5 – Distance in Political stability index
V6 – Distance in Doing business index
V7 – Distance in Corruption perception index
V8 – Memebership in international organizations
V9 – Cultural distance
V10 – Size of Russian Diaspora
74
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