Chapter 17: Institutional distance and international strategy
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Firms operating in international markets have to contend with a multitude of institutional environments. The institutional environment in a host market is often different from that in the home market of a firm. Understanding the differences between the home and the host country institutional environments and developing strategies to effectively manage the challenges arising due to these differences is the key to success in international business (IB) operations. Cross-national differences, in some form or the other, have been at the core of international business research. Hymer (1960/1976), in his early work on multinational corporations (MNCs), argued that firms face additional costs when operating in foreign countries. These costs of doing business abroad, which were later termed liability of foreignness (Miller and Parkhe, 2002; Zaheer, 1995; Zaheer and Mosakowski, 1997), depend on the extent of similarity/dissimilarity between the home country and the host country. The stages model of internationalization (Johanson and Vahlne, 1977) also suggests that firms gradually internationalize from low-distance countries to high-distance countries. Johanson and Vahlne (1977) suggested that distance arises due to differences in language, educational system, culture, business practices and economic development of countries. More recently, the eclectic framework of firm internationalization (Dunning, 1993) also argues for the importance of distance between the home and the host countries. Dunning (1993) takes a more holistic perspective on distance, arguing that countries differ not only in geographic distance, but also in social, cultural and political institutions.

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