Correa da Cunha, H.; Amal, M.; Andersson, S.; Floriani, D.E.; Farrell, C. The Interplay of Formal Institutional and Cultural Distances and the Financial Performance of Foreign Subsidiaries in Latin America. Int. J. Financial Stud.2023, 11, 80.
Correa da Cunha, H.; Amal, M.; Andersson, S.; Floriani, D.E.; Farrell, C. The Interplay of Formal Institutional and Cultural Distances and the Financial Performance of Foreign Subsidiaries in Latin America. Int. J. Financial Stud. 2023, 11, 80.
Correa da Cunha, H.; Amal, M.; Andersson, S.; Floriani, D.E.; Farrell, C. The Interplay of Formal Institutional and Cultural Distances and the Financial Performance of Foreign Subsidiaries in Latin America. Int. J. Financial Stud.2023, 11, 80.
Correa da Cunha, H.; Amal, M.; Andersson, S.; Floriani, D.E.; Farrell, C. The Interplay of Formal Institutional and Cultural Distances and the Financial Performance of Foreign Subsidiaries in Latin America. Int. J. Financial Stud. 2023, 11, 80.
Abstract
We investigate how formal institutional distance (FID) moderates the relationship between cul-tural distance (CD) and the financial performance of foreign subsidiaries 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` 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 have a positive moderating effect, increasing the impact of CD on finan-cial performance. This is mainly because foreign subsidiary firms may be more reliant on their ca-pacity 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 including 22 developed and 22 developing home countries and over 1400 foreign subsidiaries during a period of 3 consecutive years operating in 10 of the largest economies (host countries) in Latin America including: Argentina, Brazil, Colombia, Chile, Ecuador, Mexico, Panama, Peru, Uruguay, and Venezuela. Findings confirm the asymmetric effects of CD, howev-er, by considering the direction of FID, our findings reveal that the higher the FID towards less developed host countries, the more significant the effects of CD on the financial performance. These findings contribute to the knowledge of how formal and informal institutional distances in-teract by showing that the greater the FID towards less developed host countries, to higher the impact of CD on the financial performance of foreign subsidiary firms.
Keywords
Cultural Distance; Formal Institutional Distance; Institutional Environment; Foreign subsidiaries; Latin America; Formal Institutions; Psychic Distance; Moderation; Asymmetry; Asymmetry of Distance; Financial Performance
Subject
Business, Economics and Management, Business and Management
Copyright:
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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