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- Correa da Cunha, Henrique, et al.
(author)
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The moderating effects of formal institutional distance on the relationship between cultural distance and performance : The case of foreign subsidiaries in Latin America
- 2018
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Conference paper (peer-reviewed)abstract
- This study investigates how Cultural and Formal Institutional distances and their interaction affect the performance of subsidiary firms in Latin America. We show that using Kogut and Singh (1988) index or attributing the positive and negative signals for distances in opposite directions fail to capture asymmetry as it treats distance as either symmetric or opposing symmetric. In order to overcome this limitations distance in opposite directions are measured separately and independently in a way that allows verifying its asymmetrical effects. Tests include 1466 subsidiaries and 168 combinations of home and host countries for a period ranging from 2013 to 2015. Findings confirm that formal and cultural distances are asymmetric as the effects depend on the direction. Moreover not all formal institutional distances affect in a negative manner the performance of developed country subsidiaries operating in less developed countries as these firms know how to interpret and respond to different regulatory quality conditions in the host countries. We show that Latin American firms are in advantage dealing with formal institutional distances while they are affected in the same manner by cultural distances when compared to other emerging market firms from outside Latin America. Findings indicate that emerging market firms are affected in a positive manner when operating in less developed countries and in a negative way when institutions in the host country are superior to its home country. Finally, results show that formal institutional distances moderate in a positive manner the relationship between cultural distance and performance.
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