Formal and Informal Patterns of Coordination
New Horizons in Institutional and Evolutionary Economics series
Edited by Werner Pascha, Cornelia Storz and Markus Taube
Chapter 11: The Role of Institutional Conditions in Japanese FDI in European Transition Economies
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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