The Relative Effects of Institutions on Ownership in Acquisitions

Abstract

Purpose - Globalization has increased competition to an international level. However, limited market experience causes uncertainty, affecting how firms strategize their entry. Institutional distance can be a dominant cause of such environmental uncertainty. The institutional environment incorporates three institutional pillars; the regulatory pillar, the normative pillar and the cognitive pillar. Institutions are shaped by culture and desires to protect domestic business, meaning institutions differ between countries. This is known as institutional distance. There is, however, a research gap concerning the relative influence of institutional pillars on cross-border acquisition ownership, when institutional distance is present. This thesis seeks to research the influential effect of all three institutional pillars on acquisition ownership, when firms are faced with institutional distance.

Theory - Institutional theory was the fundamental theory used in this research, applying the sociology perspective of Scott (1995). Firstly, investigations were conducted on individual pillars to see how each pillar influenced acquisition ownership. Secondly, individual pillar findings were then combined and compared, to illustrate their relative influence on acquisition ownership. Such simultaneous acknowledgement of all three institutional pillars, provided new insight on the relative effects of institutions on acquisition ownership.

Methodology - This study implemented a single method approach, using quantitative analysis. Archival data was gathered focusing on firms from three industries in eleven selected countries who conduct cross-border acquisitions (CBAs). CBAs were chosen due to their popular use as a research construct in imitation research. Cognitive distance, normative distance and regulatory distance were then used to measure institutional distance. Cognitive distance effects were measured using frequency based imitation. Normative distance was measured using two of Hofstede’s (1980) cultural value dimensions: uncertainty avoidance and collectivism. Regulatory distance was measured using World Bank Governance Indicators. Thus, it was important to strategically choose home countries to ensure a variety of dimension and indicator values with which to conduct a reliable study. Logistic regression, conducted with STATA, was then used to analyze relationships between institutions and acquisition ownership.

Key Findings – The findings illustrate that all three institutional pillars have an influential effect on acquisition ownership decisions. This reinforces the emerging belief, that studies must include all three institutional pillars in research. This finding adds to this scant research. Analyzing the comprehensive institutional environment produces more reliable results.

The findings suggest that institutional pillars form an institutional hierarchy when institutional distance exists between the home and host countries. Regulatory distance have the strongest influence on acquisition ownership. Severe regulatory sanctions threaten illegitimate behaviours, forcing foreign entrants to prioritize compliance to regulatory institutions. Normative distance has the second strongest impact on acquisition ownership. Its tacit nature camouflages dysfunctional cultural complexities that disrupt strategy implementation, which can cause a firm to relocate. Lastly, cognitive distance has the third strongest influence on acquisition ownership. Its lack of severe repercussions facilitates the prioritization of the previous two pillars. However, cognitive distance acknowledgement is important as it illustrates how host participants interpret stimuli from their environment, which informs foreign entrants of appropriate cross-national responsive behaviour.

Contributions - This study contributes to international business research by illustrating the hierarchical formation of the influence of institutional pillars on cross-border acquisition ownership, where institutional distance is present. This contribution has managerial implications. Managers are strongly encouraged to consider all of regulatory pillar, normative pillar and cognitive pillar when venturing abroad. Further, managers must acknowledge the institutional pillar hierarchy and prioritize responses accordingly, to avoid crippling outcomes that could lead to poor acquisition outcomes. Lastly, this thesis contributes to literature by highlighting the need to include collectivism as a research construct in ownership studies. Prior studies have narrowly focused on uncertainty avoidance and power distance. However, collectivism has been observed to influence ownership, likely due to the recent rise of Asia in international business.