Institutional Variety in East Asia

Institutional Variety in East Asia

Formal and Informal Patterns of Coordination

New Horizons in Institutional and Evolutionary Economics series

Edited by Werner Pascha, Cornelia Storz and Markus Taube

This illuminating book broadly addresses the emerging field of ‘diversity of capitalism’ from a comparative institutional approach. It explores the varied patterns for achieving coordination in different economic systems, applying them specifically to China, Japan and South Korea. These countries are of particular interest due to the fact that they are often considered to have developed their own peculiar blend of models of capitalism.

Chapter 11: The Role of Institutional Conditions in Japanese FDI in European Transition Economies

Norifumi Kawai

Subjects: asian studies, asian economics, economics and finance, asian economics, economics of innovation, institutional economics, innovation and technology, economics of innovation


Norifumi Kawai 11.1 INTRODUCTION The decision as to the location of foreign direct investment (FDI) abroad has been as important as entry timing and entry mode in the internationalization process of multinational enterprises (MNEs) (Dunning 1998; Meyer and Nguyen 2005). Where to invest, particularly in transition countries where market-supporting institutions are underdeveloped, can be a pivotal concern to multinational managers because failure to adapt to local institutional environments leads to increased transaction and agency costs (Meyer 2001). Drawing on North’s (1990) institutional economics, scholars of international business and strategy have documented that formal institutions (e.g. laws, taxation, regulation, intellectual property rights protection, etc.) matter for FDI location decision making (e.g. Bevan et al. 2004; Grosse and Trevino 2005; Trevino et al. 2008). North (1990) asserts that institutions influence the behavioral patterns of multiple economic agents in maximizing economic efficiency. However, previous research has failed to study the link between institutions and foreign investors’ business activity in a sociological dimension of institutional isomorphism that underscores the importance of legitimacy. Advancing our knowledge of how institutional advantages or disadvantages affect foreign firms’ location strategies has practical implications for both potential investors and host governments of such economies. For foreign firms investing in economies in transition, institutions should be treated as crucial locational variables since they have a significant influence over firm-specific factors such as resource commitment to knowledge spillover in either a positive or negative direction (Bevan et al. 2004; Dunning 2005). The extant literature suggests that organizational outcomes can be improved...

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