The Effects of Institutional Distance on Foreign-Owned Subsidiary Development: The Case of the Northwest of England

Abstract

The purpose of this paper is to analyse the effects of institutional distance on foreign-owned subsidiary development. In particular, a distinction between direct and indirect effects of formal and informal institutional distance is proposed and empirically tested. Based on a bespoke census database of all known foreign-owned subsidiaries in the Northwest of England a postal survey has been conducted. The results indicate that informal institutional distance does have a pronounced negative effect on the level of intra- and inter-organisational relationships and decision-making autonomy in foreign-owned subsidiaries. The direct effect of formal institutional distance seems to be less relevant, however, it is becoming significant when the interaction between formal and informal institutional distance is considered. The specific contribution of this study lies in the systematic and comprehensive investigation of the formal and informal institutional distance between home and host country and their effects on subsidiary development. It is one of the first studies to provide a theoretically sound investigation, based on new institutional economics and internalisation theory, of the interaction between formal and informal institutional distance in the context of foreign-owned subsidiaries.