Content area
Full Text
INTRODUCTION
The idea that the institutional environment matters for doing business is widely accepted, both within and outside international business studies (North, 1990; Scott, 2008). Exactly how institutions matter for international business is less clear, however. In the literature, two arguments prevail (Jackson & Deeg, 2008). First, resonating with the institutional literature at large, there is a generic argument that institutional profile - the institutional environment of a home or host country - matters. Operating in a certain country implies that firms are embedded in and face distinct challenges and opportunities that derive from this country's institutional environment (Dunning & Lundan, 2008; Kostova, 1997; Meyer, Estrin, Bhaumik, & Peng, 2009; Wan, 2005). Second, an argument more specific to international business is that institutional distance - the dissimilarity between the institutional environments of two or more countries in which an MNE is active - matters (Ghemawat, 2001; Xu & Shenkar, 2002; Zaheer, Schomaker, & Nachum, 2012). MNEs operate in multiple institutional environments simultaneously and the dissimilarity between these institutional environments can create all sorts of misunderstandings and legitimacy problems as well as challenges for transfers of knowledge and organizational routines (Eden & Miller, 2004; Zaheer, 1995).
This paper argues that international business research has not adequately distinguished between the two types of institutional effects, neither theoretically or empirically. Using both formal and empirical analysis, we show that the literature's tendency to reason from the perspective of MNEs from a single (developed) country makes it prone to conflate institutional distance effects and institutional profile effects. This conflation, in turn, undermines the validity of most extant institutional research, leaving little solid insights - neither for scholars nor for practitioners - on how institutions and institutional distance in particular matter for international business. On the one hand, extant institutional research is unable to tell whether a particular MNE behavior is a response to the challenges posed by a host-country's institutional profile or to the challenges posed by the dissimilarity between the host-country's institutional environment and the MNE's home-country environment. For MNEs, on the other hand, not distinguishing between profile and distance effects is problematic as well, as the two types of effects require rather different managerial responses (notably efforts to "bridge" the distance between the home and the host...