Journal of World Business 51 (2016) 600–611

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Journal of World Business

journal homepage: www.elsevier.com/locate/jwb

Emerging economies and institutional quality: Assessing the

differential effects of institutional distances on ownership strategy
Ru-Shiun Lioua,* , Mike Chen-Ho Chaob , Monica Yangc
a
Department of Marketing and Management, Texas A&M University-Central Texas, 1001 Leadership Place, Killeen, TX 76549, United States
b
Cotsakos College of Business, William Paterson University, 1600 Valley Road, Wayne, NJ 07470, United States
c
Robert B. Willumstad School of Business, Adelphi University, Garden City, NY 11530-0701, United States

A R T I C L E I N F O A B S T R A C T

Article history: The current study contributes to the institution-based view of internationalization that is contingent
Received 2 December 2014 upon the home country development. We examine the differential effects of formal and informal
Received in revised form 9 February 2016 institutions on emerging market multinational corporations’ (EMNCs) ownership strategies. Facing a
Accepted 13 March 2016
large informal institutional distance that represents diverse cultural beliefs, EMNCs opt for a low
Available online 31 March 2016
ownership position that alleviates legitimacy threat, whereas a large formal institutional distance leads
EMNCs to establish dominant ownership control. EMNC home market conditions, including market size
Keywords:
and regulatory institutional quality, further explain the differential effects of institutional distances.
Emerging market multinational
corporations (EMNCs)
Published by Elsevier Inc.
Cross-border mergers and acquisitions
(M&As)
Institutional distance
Ownership strategy

1. Introduction organizations ought to follow to gain legitimacy which is critical

for their success and survival (DiMaggio & Powell, 1983; Suchman,
Multinational corporations (MNCs) determine an appropriate 1995). Facing a large institutional distance, which refers to the
level of ownership (i.e. the extent of equity investment) in a foreign differences in home-host countries’ institutional environments, a
subsidiary by evaluating various critical strategic considerations, foreign acquirer potentially faces the threat of lacking legitimacy
such as ownership control and resource commitments (Delios & due to their unfamiliarity with the host market (Kostova, 1997; Xu
Beamish, 1999; Taylor & Zou, 1998). Traditionally, transaction cost & Shenkar, 2002). To overcome the legitimacy threat, a foreign
economics (TCE) researchers suggest that, the environmental acquirer presumably can benefit from the existing acquired firm’s
uncertainty increases a foreign acquirer’s difficulty of searching, legitimacy in the host market by sharing ownership with the
negotiating, and monitoring market transaction partners acquired firm (Estrin, Ionascu, & Meyer, 2007; Xu & Shenkar, 2002).
(Williamson, 1981). Increasing ownership control will reduce Some studies on advanced-market multinational corporations
the transaction costs and thus improves governance efficiency (AMNCs) render support for this legitimacy argument (Xu, Pan, &
(Brouthers & Hennart, 2007; Yang, 2015). However, examination of Beamish, 2004; Xu & Shenkar, 2002).
TCE was not fully carried out in some cases where a firm perceived Outward investment of emerging market multinational corpo-
host-home national differences as a high level of environmental rations (EMNCs) provides a great opportunity for researchers to
uncertainty and opted for lower equity participation to diversify resolve the seeming paradox between the governance efficiency
the investment risks in the unfamiliar market (Zhao, Luo, & Suh, (i.e., high equity participation) considered in TCE and the
2004). legitimacy argument (i.e., low equity participation) discussed in
Seeking an alternative framework to analyze national differ- institutional theory. Considering the institutional distance be-
ences, international business researchers suggest institutional tween EMNCs’ home and host markets, we posit that the
theory as a promising perspective to advance entry strategy aforementioned legitimacy argument is likely to be secondary to
research (Brouthers & Hennart, 2007; Martin, 2014). Institutional EMNCs’ governance efficiency concern for two contingencies. First,
theorists suggest institutions provide rules of the game that a low ownership position may not meet an EMNC’s special agenda
for foreign expansion, such as seeking strategic assets (Luo & Tung,
2007) and escaping home market institutional constraints
* Corresponding author. (Cuervo-Cazurra & Ramamurti, 2015). A dominant position to
E-mail addresses: [email protected], [email protected] (R.-S. Liou). secure ownership control rather than a minority stake can be

http://dx.doi.org/10.1016/j.jwb.2016.03.001
1090-9516/Published by Elsevier Inc.
 R.-S. Liou et al. / Journal of World Business 51 (2016) 600–611 601

desirable for EMNCs’ strategic concerns derived from their home originating from countries with lower regulatory institutional
market constraints (Brouthers & Hennart, 2007; Delios & Beamish, quality to invest more in countries with higher regulatory
1999). Second, some studies such as Ang, Benischke, & Doh (2015) institutional quality (Cuervo-Cazurra & Ramamurti, 2015).
highlight the multi-dimensional nature and differential effects of
the institutional distance. Due to the explicit nature and unified 2.2. Institutional distance and EMNCs’ ownership strategy
enforcement of formal institutional rules, EMNCs may compre-
hend and comply with the formal institutions in the absence of a Institutional distance, the extent of similarity or dissimilarity
local partner’s assistance (Eden & Miller, 2004; Kostova & Zaheer, between home and host countries’ institutions (Kostova, 1997),
1999). presents barriers for an MNC to reap the benefit of internationali-
Taking into account the aforementioned contingencies that zation (Dikova, Sahib, & Van Witteloostuijn, 2010). In terms of
arise from the unique context of EMNCs, we design the current formal institutional environment, countries differ with regard to
study to take a fresh look at one of the important inquiries in the political and judicial regulations (e.g., common law vs. civil
international strategy research: how do dimensions of institution- law), economic rules (e.g., contracts), and third-party enforcement
al distance and home market conditions influence a foreign (Dikova et al., 2010); as far as the informal national institutional
acquirer’s ownership strategy? We argue that formal and informal environment, there are differences with regard to conventions,
institutional distances have opposite effects on EMNCs’ ownership codes of conduct, and norms of behavior (Dikova et al., 2010). In the
strategies in their cross-border mergers and acquisitions (M&As). current study, we follow a majority of cross-border M&As research
Driven by efficiency considerations, EMNCs will opt for a higher and use formal institutional distance to capture national differ-
equity participation to enjoy a dominant ownership control in a ences in regulatory environment, while informal institutional
host market with a larger formal institutional distance. On the distance represents the national cultural differences (Dikova et al.,
other hand, facing a larger informal institutional distance, the 2010).
EMNCs, driven by legitimacy concerns, will take less ownership A foreign firm’s compliance responses to institutional pressure
and rely on the existing legitimacy of foreign counterparts to are critical to gain legitimacy in a host market (Raaijmakers,
alleviate the legitimacy threat in the host market. Vermeulen, Meeus, & Zietsma, 2015; Suchman, 1995). When
Further, we include two critical home market factors that responding to formal and informal institutional pressures in a host
highlight EMNCs’ unique strategic concerns. Recent international market, a foreign firm may gain legitimacy through different
business researchers suggest that EMNCs’ particularly urgent means. In terms of formal institutional pressures, such as
agenda of foreign expansion mainly arises from constraints in their regulations and laws, the legitimacy requirements are explicitly
home markets (Cuervo-Cazurra & Ramamurti, 2015; Luo & Tung, codified and usually enforced by a government agency (Scott,
2007) and the contextual combinations of the home-host 1995). A foreign firm needs to change the company practices to
environmental factors are imperative in understanding EMNCs’ comply with the institutional rules to be able to operate legally in
international strategy (Child & Marinova, 2014; Cui & Jiang, 2012). the host market (e.g., Chinese firms’ compliance with the product
Hence, we include EMNCs’ home market size and regulatory safety regulations in the U.S.). On the other hand, the isomorphism
institutional quality to study the moderating effects of EMNCs’ pressures from the informal institutions are exerted through
home market characteristics on the relationship between institu- mimetic and normative mechanisms (Scott, 1995). Without the
tional distance and EMNCs’ ownership strategy. The two moder- centralized coercive mechanism, individual firms have discretion
ators of EMNCs’ home market characteristics identified in the to comply with legitimacy requirements shaped by informal
current study provide important evidence that EMNCs’ ownership institutional pressures (Goodrick & Salancik, 1996), which thus
considerations in foreign expansion are constrained by their home presents greater challenges for foreign firms (Kostova & Zaheer,
market conditions (Child & Marinova, 2014; Cui & Jiang, 2012). 1999).
A large institutional distance increases the liability of foreign-
2. Theoretical background and hypothesis development ness, raising the additional cost of doing business in the host
market (Baik, Kang, Kim, & Lee, 2013; Bell, Moore, & Filatotchev,
2.1. EMNCs’ urgent need for internationalization and home market 2012). The liability of foreignness results in legitimacy threat in
conditions multiple ways, including the foreign acquirer’s lack of host-market
knowledge and relationships with local constituents, as well as
Among an array of entry modes, EMNCs have conducted a potential discrimination hazards (Eden & Miller, 2004). One of the
record volume of cross-border mergers and acquisitions to effective strategies to mitigate these legitimacy threats is by
expediently establish global landscape (Luo & Tung, 2007). sharing ownership with a local firm to benefit from the existing
Compared to greenfield investment, acquisitions afford the EMNCs legitimacy of the local firm (Xu & Shenkar, 2002). A local partner
opportunities to work with the local partnering firms in exploiting that is embedded in the host institutional environment can provide
cost-advantages and realizing the synergy benefits (Buckley, Elia, & needed host-market knowledge as well as the existing network
Kafouros, 2014). Recent research suggests that EMNCs differ from with suppliers and consumers in the host market (Xu et al., 2004).
traditional AMNCs in that EMNCs demonstrate an accelerated Additionally, the continuous equity involvement from the local
internationalization process (Bonaglia, Goldstein, & Mathews, firm benefits the foreign firm in that it allows the foreign firm to
2007; Mathews, 2006). Other than the economic motivation enjoy the “spillover effects” of the local firm’s legitimacy in the
(i.e., asset exploitation and exploration) of EMNCs’ internationali- host market, and thus becomes less likely to be the target of
zation, researchers suggest that the inferior market-supporting discrimination (Kostova & Zaheer, 1999; Yiu & Makino, 2002).
institutions in EMNCs’ home market play a significant role in The implicit nature of informal institutional rules presents great
driving EMNCs’ early internationalization. Cuervo-Cazurra and challenges for EMNCs to comprehend the legitimacy requirements
Ramamurti (2015) argued that, in addition to the traditionally and manage acquired subsidiaries. For instance, extensive cross-
conceptualized “pull” factors (such as the large markets and cultural leadership research suggests there is no universally
wealthier consumers of advanced countries), “push” factors such effective managerial approach across all cultural contexts (Jiang,
as weak institutions and economic underdevelopment in their Colakoglu, Lepak, Blasi, & Kruse, 2015; Kirkman, Chen, Farh, Chen,
home countries drive EMNCs to invest in advanced countries. In & Lowe, 2009). A managerial approach that is congruent with
other words, “escape motivation” will encourage EMNCs cultural values shared by local employees is more likely to attain
602 R.-S. Liou et al. / Journal of World Business 51 (2016) 600–611

positive employee outcomes, such as job satisfaction and acquired firms to accept EMNCs’ position as a rescuer financially
cooperation (Hofstede, 1991; Robert, Probst, Martocchio, Drasgow, and thus requires EMNCs to provide a higher degree of equity
& Lawler, 2000). By sharing ownership with the acquired firm, investment. As noted in a recent study on the comparison between
EMNCs can gain better support from local constituents (such as AMNCs and EMNCs, EMNCs are likely to acquire more ownership
employees and suppliers) who are familiar with the local firm’s than AMNCs in response to the country differences in trade and
operational practices that are congruent with the local cultural investment freedom (De Beule, Elia, & Piscitello, 2014). Similarly,
values and normative beliefs. Thus, consistent with the above Lahiri, Elando and Kundu (2014) compared the ownership choices
reasoning that sharing ownership mitigates legitimacy threat, we of AMNCs and EMNCs in the services sector and found that a large
propose EMNCs’ likelihood of sharing ownership increases while formal institutional distance led to a higher likelihood of full
facing larger informal institutional distance. acquisitions for EMNCs, but acquirers from developed economies
show preference for partial acquisition under similar circum-
Hypothesis 1. A greater informal institutional distance between
stances. In light of these recent findings, we formally propose a
EMNCs’ home countries and the host countries of their M&A
hypothesis as below.
targets leads to a lower degree of EMNC ownership in their
cross-border M&As. Hypothesis 2. A greater formal institutional distance between
EMNCs’ home countries and the host countries of their M&A
EMNCs exhibit different considerations facing formal institu-
targets leads to a higher degree of ownership in their cross-
tional distance. First, in contrast to the less codified informal
border M&As.
institutional rules, formal institutional rules are easier to under-
stand and comply with. Due to the coercive mechanism that
enforces the formal institutional rules, EMNCs will have to overtly 2.2.1. The moderating effect of EMNC’s home market size
comply with the formal institutional rules, such as environmental As the population of middle income earners increases, major
protection laws, to gain legitimacy in the host market (Child & Tsai, multinationals are eager to tap into potential emerging markets
2005; Suchman, 1995). The compliance response to formal (Prahalad, 2005). Some EMNCs become determined to upgrade
institutional rules can be accomplished in the absence of a local their core competencies to compete with the established multi-
partner’s assistance. Second, in general, formal institutions are less nationals in their home turfs (Dou, 2015). Indeed, Ramamurti
developed in EMNCs’ home countries than they are in developed (2012) drew upon the initial evidence from studies based on
markets (Peng, Wang, & Jiang, 2008). Hence, by acquiring a firm in Chinese EMNCs (Williamson & Raman, 2011) and proposed that
a country with stronger formal institutions, EMNCs attain the EMNCs cultivate their ownership advantage through their overseas
opportunity not only to learn from the corporate governance investments in order to exploit their ownership advantage in their
practices (Pagano, Roell, & Zechner, 2002), but also to escape from home markets. Hence, we posit that the increasing market
the stifling regulatory environments in their home countries. This potential in an EMNC’s home market will propel that EMNC’s
was seen in SabMiller’s internationalization to escape its South motive to seek upgraded organizational competencies overseas.
African context (as cited in Luo & Tung, 2007). This will in turn strengthen the EMNC’s concerns for establishing
To effectively accrue the benefit of entering a host market with ownership control to enhance the governance efficiency of
stronger market-supporting institutions, EMNCs have a propensity transferring acquired strategic assets. On the one hand, facing
to establish a high ownership position in their M&As. A substantial informal institutional distance, EMNCs originating from a larger
ownership control helps streamline coordination tasks, which size of home market economy have less consideration for relying
allows for the effective transfer of corporate governance practices on host market partners to establish legitimacy in the host market.
across borders (Grossman & Hart, 1986; Kogut & Zander, 1993). On the other hand, facing formal institutional distance, EMNCs
Further, a dominant ownership control also benefits EMNCs’ originating from a larger home market are driven to secure even
“escape motivation” (Cuervo-Cazurra & Ramamurti, 2015). By higher ownership control to benefit from the well-regulated
owning a majority of stake in the foreign establishment, EMNCs market-supporting institutions in the host market.
can effectively orchestrate their operations between their home
Hypothesis 3a. EMNCs’ home market size negatively moderates
and host markets to mitigate the investment risks that arise from
the relationship between informal institutional distance and
the unpredictable business regulations in their home markets
ownership position.
(Cuervo-Cazurra & Genc, 2008; Cuervo-Cazurra & Ramamurti,
2015). Given the above discussion, we believe that formal
Hypothesis 3b. EMNCs’ home market size positively moderates
institutional distance does not elicit the same responses as does
the relationship between formal institutional distance and
informal institutional distance. Driven by an EMNC’s urgent
ownership position.
agenda for foreign expansion, the legitimacy threat presented
by differences in the formal institutional environment does not
preclude EMNCs from securing ownership control. Instead, when 2.2.2. Regulatory institutional quality
facing formal institutional distance, EMNCs tend to opt for higher Another important characteristic of emerging economies lies in
equity participation to be able to exercise ownership control. their transitioning formal institutions (Peng, 2003). Recent studies
In addition to the EMNCs’ strategic concerns, from the acquired suggest that an EMNC’s stock performance in a developed market
firm’s perspective, the country-of-origin stereotype of emerging can be adversely impacted by the investors’ perceptions of the
economies that are associated with lacking well-developed formal EMNC’s country of origin (Bell et al., 2008, 2012). To overcome such
institutions can adversely affect an EMNC’s credibility as a a negative image, EMNCs acquire substantial ownership in well-
competent acquirer (Mulok, Raja, & Ainuddin, 2010; Sim & established brands in developed markets to curtail potential
Pandian, 2003). Recent studies suggest that an EMNC’s stock discrimination hazard from their consumers and investors, as
performance in its initial public offering (IPO) in a developed exemplified by Tata Motor’s iconic acquisition of Jaguar Land Rover.
market is negatively influenced by the investors’ perception of the Given that these EMNCs aim to escape the less developed formal
EMNC’s country of origin (Bell, Moore, & Al-Shammari, 2008 ; Bell institutions in their home market, we suggest that the inferior
et al., 2012). Thus, the to-be-acquired firm in the host market may regulatory institutional quality of an EMNC’s home market will
not view an EMNC in the same positive light as it views other strengthen the EMNC’s motive to establish substantial ownership
potential acquirers. In other words, it might be easier for the
 R.-S. Liou et al. / Journal of World Business 51 (2016) 600–611 603

in a foreign expansion. By establishing dominant control, the 2012 (UNCTAD, 2014). As shown in Table 1, despite sharing the
EMNC can better position itself to diversify the risks in its home emerging economy status, the nine countries have different levels
base and build a reputable corporate image in a foreign market. of GDP per capita as well as different degrees of regulatory
Thus, we offer the following set of moderation hypotheses that institutional quality.
signifies the importance of considering the differences in country After deleting deals with missing values, the final sample
development among emerging economies (Child & Marinova, consists of 2644 deals completed by 1097 firms. As shown in
2014). As the emerging economy suffers from its inferior Table 2, acquiring firms in our sample are mostly from the BRICS
regulatory institutions, EMNCs have stronger escape motivation, countries. The top three destinations of these cross-border M&As
which mitigates the legitimacy threat associated with the informal include the U.S., the UK, and Russia. A majority of EMNCs are in the
institutional distance and strengthens the governance efficiency manufacturing industry, followed by the service industry and
consideration of the formal institutional distance. transportation industry. Approximately 60% of EMNC’ acquisitions
in our sample occurred in emerging markets and the rest of the
Hypothesis 4a. The inferior regulatory institutional quality in
acquisitions in developed markets.
EMNCs’ home markets negatively moderates the relationship
between informal institutional distance and ownership posi-
3.1.1. Dependent variable
tion.
The measurement and the data sources of all variables are listed
in Table 3. The dependent variable, Degree of ownership of cross-
Hypothesis 4b. The inferior regulatory institutional quality in
border M&As, is measured as the percentage of equity that the
EMNCs’ home markets positively moderates the relationship
acquirer owned after the acquisition. The SDC Platinum database
between formal institutional distance and ownership position.
reports the degree of ownership as a continuous variable with
In sum, Fig. 1 provides a conceptual framework of the current values ranging from 0.1% to 100%. We use 10% as the cutoff value to
study. exclude portfolio-investment-like M&As. The continuous variable
of the equity participation has an advantage over the arbitrary
3. Methods dichotomous variable between full and partial acquisitions to
explain the fine-grained distinctions of change in ownership stake
3.1. Sample and data collection (See discussion in Chen & Hennart, 2004; Malhotra, Sivakumar, &
Zhu, 2011).
The M&As are sought through SDC Platinum, which is produced
by Thomson Reuters Financial Securities Data. We include all of the 3.1.2. Independent variables and moderators
completed, worldwide cross-border M&As initiated by EMNCs The measures of Informal and Formal institutional distance are
from nine emerging countries between 2000 and 2012, and described below. Cultural distance has been widely utilized to
exclude the deals that are a series of acquisitions in the same measure and analyze cross-border behaviors (e.g., Ang et al., 2015;
target. These nine emerging countries, including Brazil, China, Gaur, Delios, & Singh, 2007) and is associated with informal
India, Indonesia, Mexico, Russia, South Africa, Thailand, and institutional factors (Estrin et al., 2007; House, Hanges, Javidan,
Turkey, account for 21.5% of the world’s cross-border M&As in Dorfman, & Gupta, 2004). Thus, Informal institutional distance is

Fig. 1. Conceptual Framework of Institutions and EMNCs’ Ownership Strategy.

604 R.-S. Liou et al. / Journal of World Business 51 (2016) 600–611

Table 1
Major country-level characteristics of selected nine emerging economies.

GNI per capita (US Population 2014 Outward FDI (US$ in Percentage of World 2014 GDP per capita Regulatory Institutional
$)a (million)a millions)b M&Asb (US$)c Qualityd
Brazil 11,690 200.362
3540 2.3 11,382 56.6
China 6560 1,357.380 116,000 11.5 7595 52.7
India 1570 1,252.140 9848 0.5 1596 54.6
Indonesia 3580 249.866 7077 0.1 3491 58.1
Mexico 9940 122.332 5201 2 10,231 66.4
Russia 13,860 143.500 56,438 2.5 12,942 52.1
South 7190 52.982 6938 0.3 6478 62.6
Africa
Thailand 5370 67.011 7692 1.7 5519 62.4
Turkey 10,950 74.933 6658 0.6 10,529 63.2
a
World Bank Doing Business Report Series (2015).
b
Percentage calculated based on the cross-border M&As data in 2012 from UNCTAD.
c
World Bank Open Data (2015).
d
Index of Economic Freedom (2015).

countries and expanded the dataset in the original Hofstede’s

Table 2 studies (Hofstede, Hofstede, & Minkov, 2010). We download the
Major characteristics of the acquisitions.
updated dataset from Hofstede’s website and construct the
Acquirers’ home Percentage based on the Percentage based on the value measure using Kogut and Singh’s (1988) formula, which produces
country number of deals of the deals an absolute value of the score difference between host and home
Brazil 9% 5.97% cultures. A low score on this measurement represents cultural
China 15.80% 15.46% proximity and a high score means that home and host countries are
India 29.30% 28.86%
culturally more distant.
Indonesia 4.10% 6.35%
Mexico 6.20% 8.20% The data for Formal institutional distance is collected from the
Russia 17.30% 17.78% Index of Economic Freedom developed by the Heritage Foundation.
South Africa 11.40% 9.21% Economic freedom refers to the absence of government coercion or
Thailand 4.50% 5.41% constraint on the production, distribution, or consumption of
Turkey 2.40% 2.76%
goods and services (O’Driscoll, Feulner, & O’Grady, 2003). The
Acquirers’ industry Heritage Foundation has tracked and published the time-variant
Manufacturing 41.91% 40.14% index of economic freedom for 186 countries since 1995 (Johnson &
Service 15.31% 15.04% Sheehy, 1996), thereby capturing the level of development of
Transportation 12.43% 14.96%
formal, regulatory institutions (e.g., Aybar & Ficici, 2009). This
Mining/ 11.79% 12.60%
Construction index consists of 10 quantitative and qualitative factors
Agriculture 1.30% 1.09% (i.e., property rights, freedom from corruption, fiscal freedom,
Others 17.26% 16.17% government spending, business freedom, labor freedom, monetary
freedom, trade freedom, investment freedom, and financial
Top 10 target nation
USA 14.78% 10.07%
freedom) grouped into four pillars (i.e., rule of law, limited
UK 6.74% 9.85% government, regulatory efficiency, and open markets). A country’s
Russia 6.32% 8.37% overall economic freedom score is derived by averaging the grades
Brazil 5.02% 6.78% for each of these 10 factors on a scale of 0–100. For example, China
Australia 4.67% 6.56%
scores 52.7 and is categorized as a “mostly unfree” country,
China 4.60% 4.72%
India 4.25% 3.93% according to the 2015 Index. The Formal institutional distance is
Indonesia 4.00% 3.48% calculated as the score difference between the acquiring firm’s
Hong Kong 3.62% 2.04% home country and the host country of the target. Positive values
Singapore 2.84% 1.92% indicate the host market has a higher score on the index of
Target market status
economic freedom than the EMNC’s home country, and negative
Developed 42.60% 40.32% values indicate the opposite.
Emerging 57.40% 59.68% Furthermore, two home country characteristics are utilized as
moderators in the present study. First, we include the size of home
Diversification
country economy (Home market size) in the moderation analysis,
Related 67.18% 65.28%
Unrelated 32.82% 34.72% measured by the natural logarithm of gross domestic product
divided by the population in each home market (Buckley et al.,
Ownership decision 2007; Rossi & Volpin, 2004). Second, Regulatory institutional quality
Full 57.60% 54.92% refers to the quality of home institutions relevant to the ease of
Partial 42.40% 45.08%
conducting business activities. It is based on the economic freedom
index derived by averaging ten economic freedom factors as
mentioned above. The higher the score, the better the quality is of
home country institutions.
measured through the four cultural dimensions of power distance,
3.1.3. Control variables
uncertainty avoidance, individualism, and masculinity, as identi-
We control for various factors influencing EMNCs’ ownership
fied by Hofstede (1980). Following Hofstede’s methodology,
strategy, including the characteristics of the deal, of the acquiring
researchers have continuously collected data in additional
firm, and of the host country. For deal-specific factors, we control
 R.-S. Liou et al. / Journal of World Business 51 (2016) 600–611 605

Table 3
Variables, measures and data sources.

Variable name Description/Measure Source

Dependent Degree of The percentage of equity that the acquirer owned after the acquisition SDC Platinum database
variable ownership

Independent Informal Kogut and Singh (1988) formula produced an absolute value of the score difference Power distance, uncertainty avoidance,
variables institutional between host and home cultures. To be specific, a composite index was formed based individualism, and masculinity, as identified by
distance on the deviation along each of the four cultural dimensions of each host culture from Hofstede (1980)
the home culture ranking. The deviations were corrected for differences in the
variances of each dimension and then arithmetically averaged
Formal Averaged ten economic freedom factors of each market and then calculated the score Index of Economic Freedom, developed by the
institutional difference between the acquiring firm’s home country and the host country of the Heritage Foundation
distance target

Moderators Home market The natural logarithm of gross domestic product per capita of each home market The World Bank
size
Regulatory Averaged ten economic freedom factors of each home market Index of Economic Freedom
institutional
quality

Control Unrelated Using the first two digits of SIC codes of acquiring and target firms, coded Unrelated as SDC Platinum database
variables 1 when acquiring and target firms have different SIC codes and 0 if otherwise
Government Coded as 1 when the acquiring firm is marked as government owned/involvement SDC Platinum database
Involvement flagged by SDC database and 0 if otherwise
Friendly Coded as 1 when the management at the target firm has a friendly attitude towards the SDC Platinum database
acquisition event and 0 if otherwise
Deal size The dollar value of each cross-border M&A deal SDC Platinum database
Cash Coded as 1 when the payment is 100% in cash and 0 for other methods of payment SDC Platinum database
Firm size The log value of the total assets of acquiring firms SDC Platinum database
Past experience Counted the cumulative number of cross-border M&As executed by the acquirer SDC Platinum database
before the focal acquisition under study
Market size The natural logarithm of gross GDP of each host market The World Bank
R&D funding A ratio of capital expenditures (both public and private) on creative work undertaken The World Bank
systematically to increase knowledge and the use of knowledge for new applications
to the GDP of each country
Government Business Executive Opinion Survey on the extent of government's restriction on Global Competitiveness Report, developed by
restriction foreign investment the World Economic Forum
Home GDP The annual growth rate of GDP in the home country of the acquiring firm The World Bank
Growth
Year dummy Created 12 dummy variables to represent the period of time between 2000 and 2012
Country Created 8 dummy variables to represent the nine emerging markets of acquiring firms
dummy
Industry Coded based on acquiring firms’ first two-digit SIC codes SDC Platinum database
dummy

for the influences of industry relatedness (Unrelated; Bergh, 1997), of the host market. In the past research, the market size of the host
the target’s attitude towards the acquisition event (Friendly), country (Market size) has shown to attract a foreign acquirer to
payment method (Cash) and transaction value (Deal size) on the penetrate that host market and subsequently influences its
ownership decisions. Prior studies have shown that the target’s ownership strategy (Buckley et al., 2007; Duanmu, 2012). Further,
attitude toward the acquisition event has a direct impact on the R&D funding is measured as a ratio of capital expenditures (both
equity stake and premium payout (e.g., Reuer, Tong, & Wu, 2012). public and private) on creative work undertaken systematically to
Payment method and transaction value represent the resources increase knowledge and the use of knowledge for new applications
required to complete the deal and have been suggested to influence to the GDP of each country. Because investment in R&D facilities
ownership decisions (King, Dalton, Daily, & Covin, 2003; Lahiri requires unique human and physical infrastructure, it could be a
et al., 2014). proxy for the technological capacity of a host country. Additionally,
Further, to account for individual firms’ capability for resource we control for the host country’s government restrictions on foreign
commitments, we control for Firm size, measured by the log value investment, which can directly impact how much ownership stake
of the total assets of acquiring firms (Cui & Jiang, 2009). We also a foreign firm can acquire in the target firm. We measure
consider the acquiring firm’s prior experience in cross-border government restrictions based on the “Business Executive Opinion
M&As (Past experience). Firms with greater experience can better Survey” of Global Competitiveness Report developed by World
bear the risks of managing foreign operations, and hence may Economic Forum. This survey asked executives about their
prefer a full or high ownership in acquisition (Lahiri et al., 2014). evaluations on the extent of government's restriction on foreign
We also control for the influence of government-related ownership investment, including items such as, “To what extent do rules
(Government Involvement) of the acquiring firm because the governing foreign direct investment (FDI) encourage or discourage
attitudes of host countries are usually more conservative toward it? [1 = strongly discourage FDI; 7 = strongly encourage FDI]”. Other
cross-border M&A deals initiated by firms that are government- macroeconomic environmental influences on the economic
involved than those initiated by privately-owned firms (Cui & growth in the acquirer’s home country (Home GDP growth) are
Jiang, 2012). also included as a control variable and measured by the annual
In terms of the influences of host country characteristics on growth rate of GDP.
EMNC ownership decisions, we first control for the attractiveness
606 R.-S. Liou et al. / Journal of World Business 51 (2016) 600–611

Finally, to control for the exogenous variance in individual

0.30***
countries and industry environment over the study period, we use
15

year dummies to code the year of acquisitions, create eight dummy

variables to represent the nine emerging economies, and include

0.08***
0.40***
industry dummy variables that are coded based on acquiring firms’
14

first two-digit SIC codes (Brouthers & Brouthers, 2003).

0.22***
3.2. Model and analysis

0.20***
0.34***
13

To examine the relationships affecting the degree of ownership,

we conduct a Tobit regression analysis, because this dependent

0.25***

0.12***
0.13***

0.02
variable is bounded between 0 and 1 (Chari & Chang, 2009). The
12

model can be summarized as:

X X X

0.07***
Yn ¼ bo þ biXi þ bjIj þ bkCk þ E
0.46***
0.07***
0.07***
0.04
11

where: Yn refers to the degree of ownership in cross-border M&As,

Xi stands for a set of independent variables proposed in the

0.05*
0.06*
0.05*

0.05*

hypotheses, Ij refers to the moderating variables, and Ck denotes

0.03

0.02
10

control variables.
To address the potential concern of the common-factor effect
0.25***

0.02

0.05*

(Lincoln, 1984) resulting from deals initiated by the same firm, we

0.03
0.01

0.01
0.01
9

cluster the error terms of these deals that were initiated by the
same firm. Additionally, we plot significant interactions by

0.02

0.04
0.02
0.02
0.01

0.01

0.01

0.01

splitting the sample on the moderating variables, including home

8

market size and regulatory institutional quality, into high and low
categories, which are created based on one standard deviation
0.43***
0.14***

0.03
0.06**

0.06**
0.03
0.02
0.02
0.01

above and below the mean value of the moderating variable

7

respectively.

0.08***

0.06**

0.06**

0.07**

0.01

0.01

4. Results
0.02
0.03
0.01
0.01
6

Table 4 presents the descriptive statistics and the correlation

0.05*

0.05*

coefficients for all variables except country, acquisition year, and

0.03

0.03

0.03

0.02

0.03
0.01

0.01
0.01

0.01

industry dummy variables. The highest correlation occurs between

5

formal and informal institutional distance (0.48). To assess whether

0.08***

multi-collinearity is a major concern, we examine variance

0.06**

0.02
0.02

0.03
0.01

0.01

0.01

0.01

0.01

0.01
0.01

inflation factor scores (Belsley, Kuh, & Welsch, 1980); they are
under 10 in all regression models. Thus, we find no evidence of
4

multi-collinearity in all regression results.

Descriptive Statistics and Correlations for the Degree of Ownership in Cross-border M&As.a

0.20***
0.15***
0.05*

0.05*

Table 5 displays the regression results for the degree of

0.02
0.04

0.03

0.02

0.02
0.02

0.01

0.01

0.01

ownership. For the informal institutional distance, Models 2 and

3

5 show that the estimated coefficients are negative (b =
2.83 in

Model 2; b =
2.81 in Model 6) and significant at 0.05 level. These

0.07***

0.13***
0.48***

0.08***
0.08***
0.07***

0.03

0.03

0.01

0.01
0.05*

0.05*

0.05*

support Hypothesis 1 that EMNCs are likely to have a lower

0.03
2

ownership position when entering a target market with a larger

informal institutional distance. Hypothesis 2, which states that the
0.08***

0.08***
0.07***

0.21***

0.12***

0.05*

degree of ownership is positively associated with the formal

0.03

0.02

0.04
0.03
0.01

0.01

0.01
0.01
0.01

institutional distance, is supported by Model 3 (b = 0.84, p < 0.05)

1

and Model 6 (b = 0.85, p < 0.05). Therefore, EMNCs are likely to

13.43

2.59

15.92

3.87
0.25

0.38

0.94
10.87

0.42
0.47
0.21

2.21
27.66

have higher ownership positions when entering a target market

8.13
1.10
1.17
s.d.

with a larger formal institutional distance.

In terms of the moderating influence of the economic situation
Mean

3.35

13.78

72.82

3.48
0.33

0.93

75.96
0.05

6.07

79.21
0.51
81.28

11.66

1.42
0.18
1.13

of the home country, the interaction between Informal institutional

distance and Home market size (b =
1.25, p > 0.05 in Model 4;
b =
1.25, p > 0.05 in Model 6) was not significantly related to the
16. Regulatory institutional quality

degree of ownership in cross-border M&As. On the other hand, the

interaction of Formal institutional distance and Home market size
15. Home market size (log)

was positively related to the degree of ownership in cross-border

2. Informal institutional

M&As (b = 1.06, p < 0.05 in Model 4; b = 1.06, p < 0.05 in Model 6).
1. Degree of ownership

14. Home GDP growth

3. Formal institutional

sample size is 2644.

5. Gov. involvement

Fig. 2 depicts the significant moderating effect of the EMNC’s home

10. Past experience

13. Gov. restriction

9. Firm size (log)

12. R&D funding

market size. This graph shows an ordinal interaction, such that the
7. Dealsize (log)

11. Market size

relationship between the formal institutional distance and the

p < 0.001.
4. Unrelated

6. Friendly

p < 0.01.
distance

distance

p < 0.05.

degree of ownership is positive for acquiring firms coming from

Variable

8. Cash

countries of both low and high GDP per capita, but the positive
Table 4

relationship is stronger for acquiring firms with a high home

***
**
a

*
 R.-S. Liou et al. / Journal of World Business 51 (2016) 600–611 607

Table 5
Results of the Regression Analysis for the Degree of Ownership in Cross-border M&As.

Independent Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Test Hypotheses
Step 1: Control
Unrelated
1.674
1.673
1.672
1.589
1.587
1.586
(1.713) (1.997) (2.001) (1.642) (1.642) (1.642)

Gov. involvement 12.505** 12.387** 12.421** 12.435** 12.426** 12.432*

(4.421) (4.866) (4.882) (4.523) (4.520) (4.521)

Friendly 18.256*** 18.078*** 18.086*** 18.034*** 18.035*** 18.035**

(3.685) (3.978) (4.049) (4.154) (4.156) (4.155)

Dealsize (log) 1.734** 1.701** 1.713** 1.674** 1.676** 1.672**

(0.538) (0.502) (0.524) (0.496) (0.474) (0.476)

Cash 2.282 2.193 2.194 2.186 2.185 2.185

(1.881) (1.183) (1.184) (1.185) (1.183) (1.184)

Firm size (log)
1.621**
1.443*
1.476*
1.570*
1.582*
1.571*

(0.486) (0.576) (0.579) (0.653) (0.648) (0.651)

Past experience
0.409
0.408
0.406
0.408
0.408
0.408

(0.876) (0.875) (0.873) (0.876) (0.875) (0.875)

Market size
3.631*
3.595*
3.576*
3.572*
3.579*
3.576*

(1.430) (1.476) (1.474) (1.421) (1.428) (1.422)
R&D funding 2.403 2.368 2.374 2.524 2.386 2.325
(1.256) (1.284) (1.465) (1.846) (1.845) (1.842)

Gov. restriction
1.624
1.558
1.528
1.603
1.612
1.602

(1.381) (1.634) (1.627) (1.821) (1.835) (1.827)

Home GDP growth 0.510 0.532 0.526 0.583 0.585 0.508

(0.363) (0.412) (0.411) (0.438) (0.444) (0.442)

Moderators
Home market size (log) 3.142+ 3.143+ 3.140 3.112+ 3.142 3.112+
(1.486) (1.486) (1.954) (1.508) (1.574) (1.510)

Regulatory institutional quality
1.248*
1.343*
1.340*
1.341*
1.340*
1.340*

(0.521) (0.574) (0.602) (0.601) (0.602) (0.602)

Step 2: Main effects

Informal institutional distance
2.833*
2.835*
2.811*
2.812* Hypothesis 1 is supported
(1.210) (1.215) (1.209) (1.210)

Formal institutional distance 0.843* 0.844* 0.844* 0.846* Hypothesis 2 is supported

(0.372) (0.375) (0.373) (0.373)

Step3:Moderating interactions
Informal institutional distance
1.254
1.253 Hypothesis 3a is not supported
X Home market size
(0.846) (0.847)

*
Formal institutional distance 1.061 1.060* Hypothesis 3b is supported
X Home market size (0.430) (0.428)

Informal institutional distance
1.008*
1.007* Hypothesis 4a is supported

X Regulatory institutional quality (0.407) (0.405)

Formal institutional distance 0.031* 0.030* Hypothesis 4b is supported

X Regulatory institutional quality (0.010) (0.011)

R Square 0.186 0.247 0.215 0.303 0.324 0.326

R Square Change to Model 1 0.06** 0.03** 0.12*** 0.14*** 0.14***
Model F 1.48*** 2.84*** 2.75*** 3.18*** 3.32*** 3.36***

N = 2644. All the models were run with home country, acquisition year and industry dummies. Due to space limit, the results of these dummies are not shown above.
+
p < 0.10.
*
p < 0.05.
**
p < 0.01.
***
p < 0.001.

market GDP per capita. Thus, as expected in Hypothesis 3b, an For the moderating effect of home country institutional quality,
EMNC’s home market size strengthens the positive relationship the interaction of Informal institutional distance and Regulatory
between formal institutional distance and ownership position. institutional quality is negatively related to the degree of ownership
in cross-border M&As (b =
1.01, p < 0.05 in Model 5; b =
1.01,
608 R.-S. Liou et al. / Journal of World Business 51 (2016) 600–611

Fig. 2. Moderating Effect of Home market size on the Relationship between the Formal Institutional Distance and the Degree of Ownership in Cross-border M&As.

p < 0.05 in Model 6), while the interaction of Formal institutional governance indicators produced by Kaufmann, Kraay, and Mas-
distance and Regulatory institutional quality is positively related to truzzi (2010), we follow Lahiri et al. (2014) and take the square root
the degree of ownership in cross-border M&As (b = 0.03, p < 0.05 of the sum of the squares of the difference between acquiring and
in Model 5; b = 0.03, p < 0.05 in Model 6). Figs. 3 and 4 further target nations across six governance indicators. These six
depict the moderating effects of the regulatory institutional quality indicators are voice and accountability, political stability, govern-
in EMNCs’ home country. Fig. 3 shows that the negative association ment effectiveness, regulatory quality, rule of law, and control of
between the informal institutional distance and ownership corruption. A positive value of this measure indicates that the host
position is weaker for EMNCs coming from countries with low market has a higher development of formal institutions than the
institutional quality. Thus, Hypothesis 4a is supported: an EMNC’s home country of EMNC, and a negative value indicates the
home country plagued by regulatory institutional quality strength- opposite. Likewise, we use an alternative measure of Past
ens an EMNC’s strategic concerns to secure ownership controls in experience by computing the cumulative number of cross-border
the host market. Fig. 4 suggests that the lack of market-supporting M&As by the acquirer in the same target country before the focal
institutions in EMNCs’ home country propels EMNCs to acquire acquisition under study. Alternative measures of these variables
higher ownership even in host countries with smaller formal render similar results reported in Table 5. Second, we conduct a
institutional distance, thus rendering support for Hypothesis 4b. post-hoc subsample analysis to only include acquisitions made by
As for the influence of control variables, the estimated one home country, including the subsample of India and
coefficients of Government Involvement,Friendly, and Dealsize are subsample of China. The results of the sub-sample analyses are
both positive and significant. Taken together, we find that consistent to what we report in Table 5.
government-involved, friendly, and larger M&A deals are associat- In addition, EMNCs’ different responses to formal and informal
ed with EMNCs with higher ownership positions. Furthermore, the institutional distance are amplified when we conduct an additional
host market size and firm size are negatively associated with the subgroup analysis to see whether EMNC ownership strategies
degree of ownership. These results are consistent with those of differ between acquiring developed market targets and acquiring
past studies, such as the negative association with firm size in Chari emerging market targets. The opposite responses to formal and
and Chang (2009) and the negative association with host market informal institutional distance are observed in the sample with
size in Hernández and Nieto (2015). only emerging market targets. While acquiring targets in a
developed market, EMNCs opt for higher ownership positions in
4.1. Robustness checks response to formal institutional distance, but EMNC ownership
strategy is not influenced by informal institutional distance. This
We take the following actions to assess the robustness of the finding strengthens our argument that the legitimacy threat is less
results. First, we employ an alternative measure of Formal concerning to EMNCs that are seeking ownership control to
institutional distance. Using data from the World Bank’s worldwide

Fig. 3. Moderating Effect of Regulatory Institutional Quality on the Relationship between the Informal Institutional Distance and the Degree of Ownership in Cross-border
M&As.
 R.-S. Liou et al. / Journal of World Business 51 (2016) 600–611 609

Fig. 4. Moderating Effect of Regulatory Institutional Quality on the Relationship between the Formal Institutional Distance and the Degree of Ownership in Cross-border
M&As.

acquire upgraded strategic capabilities in their foreign expansion, equity participation, which suggests that EMNCs originating from a
particularly in a developed market. market with weaker formal institutions tend to opt for a higher
ownership control in their foreign operations. In turn, the inferior
5. Discussion regulatory institutional quality in their home market also
strengthens EMNCs’ desire in securing higher ownership control,
The findings of this study improve our understanding of TCE thus mitigating the negative association between informal
and institutional theory. As evident in the finding that there exist institutional distance and ownership position
opposite effects of formal and informal distance on EMNC Noteworthy, in the present study, we observe that EMNCs might
ownership positions, the salience of governance efficiency not view institutional distance purely as a legitimacy threat, but
(i.e. high ownership) or legitimacy threat (i.e. low ownership) in also view it as an opportunity to compensate for their inferior
the host market can be explained based on the unique context of home market conditions. Only recently did some researchers
EMNC internationalization. This test of the boundary condition of suggest that deviating from the isomorphic pressures in a host
institutional distance was not readily available before the institutional environment may not necessarily put a firm at
emergence of EMNCs. Prior to 2000, the prevalence of AMNCs’ disadvantage and, rather, can be an advantage (Shi & Hoskisson,
investment in emerging economies had not presented the 2012). Deviating from the institutional requirements costs a firm a
opportunity to study a scenario in which EMNCs were motivated certain degree of legitimacy, but affords the chance for innovation
to engage in the foreign expansion to escape from their stifling and exponential growth. In sum, this study contributes to the
regulatory institutional environments. existing international business strategy literature by providing a
As expected, EMNCs tend to secure higher ownership control to holistic understanding of how home and host institutional
enjoy the governance efficiency when they conduct the acquis- environmental differences influence EMNC ownership strategies
itions in a country with better developed formal institutions. in cross-board M&As. As suggested by Ramamurti (2012), a new
Contrary to their responses to the formal institutional distance, internationalization theory for EMNCs might not be needed, but
EMNCs tend to lower their equity participation and rely on the the “contextualization” issue, which includes home and host
acquired firms to alleviate the legitimacy threat when they acquire institutional effects, certainly needs to be incorporated to enrich
a target in a country with large informal institutional distance. the existing theoretical framework (Child & Marinova, 2014).
Additionally, we argue and find support that EMNC responses to
formal and informal institutional distance in formulating its 5.1. Limitation and future research
ownership strategy are contingent upon the EMNC’s home country
development. As the home market size grows, an EMNC becomes Given the newly rising phenomena of EMNCs, we focus on
more eager to learn from its internationalization experience that EMNCs from nine major emerging economies between 2000 and
can be utilized to improve its competitiveness in its home market. 2012. While this sample provides timely, relevant findings of some
The positive association between formal institutional distance and major EMNCs’ internationalization activities, the findings may not
percentage of ownership thus will be even more profound when be applied to all emerging economies, which have various levels of
the EMNC’s home market size increases. This finding is in line with institutional constraints. For instance, an emerging economy with
Luo and Tung’s (2007) springboard perspective and provides abundant capable labor force and intense FDI from developed
evidence that EMNCs are motivated to enhance their competitive economies might create an environment where domestic firms
advantage in their home turfs. The null finding associated with may learn and develop strategic competencies domestically. Thus,
informal institutional distance is also in line with our explanation a further delineation on the various characteristics of an EMNC’s
that EMNCs are less sensitive to the synergy benefits provided by home country can provide additional insights on the degree to
informal institutional distance. which that EMNC’s ownership decisions are influenced by the
Further, in line with Cuervo-Cazurra and Ramamurti’s (2015) institutional constraints in its home market. For instance,
escape motivation argument, we observe the main effect of the governmental support policies, such as the Chinese government’s
negative association between regulatory institutional quality and open door policy, can significantly improve the financial resources
610 R.-S. Liou et al. / Journal of World Business 51 (2016) 600–611

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