The Interplay of Formal Institutional and Cultural Distances and the Financial Performance of Foreign Subsidiaries in Latin America

Henrique Correa da Cunha (), Mohamed Amal, Svante Andersson, Dinora Eliete Floriani and Carlyle Farrell
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Henrique Correa da Cunha: Department of Global Management Studies, Ted Rogers School of Management, Toronto Metropolitan University, 350 Victoria Street, Toronto, ON M58 2K3, Canada
Mohamed Amal: Programa de Pós-Graduação em Administração (PPGAd), Universidade de Blumenau (FURB), Blumenau 89030-903, SC, Brazil
Svante Andersson: Center for Innovation, Entrepreneurship and Learning (CIEL), Halmstad University, 301 18 Halmstad, Sweden
Dinora Eliete Floriani: Programa de Mestrado Profissional em Administração com Foco em Gestão, Internacionalização e Logística (PMPGIL), Universidade do Vale do Itajai (Univali), Itajai 88302-901, SC, Brazil
Carlyle Farrell: Department of Global Management Studies, Ted Rogers School of Management, Toronto Metropolitan University, 350 Victoria Street, Toronto, ON M58 2K3, Canada

IJFS, 2023, vol. 11, issue 2, 1-18

Abstract: We investigate how formal institutional distance (FID) moderates the cultural distance (CD) and financial performance relationships of foreign subsidiaries of firms. Following recent research, we estimate the asymmetric effects of CD by considering its size and direction towards host countries on the opposite poles of each cultural dimension’s scale. We propose that a limited understanding of the formal institutions in the host country, as measured by the magnitude and direction of the FID, can positively moderate the CD–performance relationship. This is mainly because foreign subsidiary firms may be more reliant on their capacity to navigate the less formal (and more implicit) aspects of the host country’s institutional environment, such as their ability to cope with the CD. We use foreign subsidiary data from the Orbis database, which includes 22 developed and 22 developing home countries and over 1400 foreign subsidiaries operating in 10 of Latin America’s largest economies (host countries) from 2012 to 2015 (a period of 3 years). Findings confirm the asymmetric effects of CD; however, by considering the direction of FID, our findings reveal that the more FID is directed towards host countries that are less developed, the more significant the effects of CD on financial performance. These findings contribute to our knowledge of how formal and informal institutional distances interact by showing that the greater the FID towards less developed host countries, the more pronounced the effects of CD.

Keywords: cultural distance; formal institutional distance; institutional environment; foreign subsidiaries; Latin America; formal institutions; psychic distance; moderation; asymmetry; asymmetry of distance; financial performance (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2023
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