Regulatory institutional distance and the United States multinational corporations' research and development investment decisions

• Published date: 01 March 2021
• Author: Priya Nagaraj,Mike Chao
• DOI: http://doi.org/10.1002/tie.22178
• Date: 01 March 2021

RESEARCH ARTICLE

Regulatory institutional distance and the United States

multinational corporations' research and development

investment decisions

Priya Nagaraj

1

| Mike Chao

2

1

Department of Economics, Finance and

Global Business, William Paterson University

of New Jersey, Wayne, New Jersey

2

Department of Management, Marketing, and

Professional Sales, William Paterson University

of New Jersey, Wayne, New Jersey

Correspondence

Mike Chao, Department of Management,

Marketing, and Professional Sales, William

Paterson University of New Jersey, 1600

Valley Road, Room 3049, Wayne, NJ 07470.

Email: chaoc@wpunj.edu

Abstract

Research and development (R&D) investment of multinational corporations (MNCs),

as a part of MNCs' foreign direct investment (FDI) decision, has been studied for both

the importance of the location for the MNC's strategy, and for the host country's

benefits from the spillover effects of investment in R&D. The R&D investment deci-

sion is often influenced by the macroeconomic environment and the institutional

framework of the host country. In this article, we argue that it is not just the level of

regulatory institutions in the host country but also the regulatory institutional dis-

tance between the home and host countries that influences the R&D investment

decision. We use the R&D expenditure data of U.S. majority owned firms' affiliates in

various countries to analyze two things. First, we study the effect of regulatory insti-

tutional distance on the decision to invest in R&D in the host country. Second, we

analyze if the regulatory institutional distance influences the intensity of R&D expen-

diture. We find significant empirical support for our hypotheses that underscores the

importance of regulations for attracting R&D investments from MNCs.

KEYWORDS

investment decisions, multinational corporations, regulatory institutional distance, research

and development

1|INTRODUCTION

Institutions comprise formal an d informal rules of conducting busi-

ness. With increased complexity ofglobal business, the enforcementof

formal rules has become exigent. Firms, both domestic and foreign,

adhere to these rulesto avoid penalty for noncompliance.Since institu-

tions are nation specific, a foreign firm engaging in business in another

country willhave to be cognizant of the institutionsin the host country.

The distance between the institutions of the home and host country

will therefore influence the decisionto do business in the host country

and the outcome of that decision. Institutional distance is defined as

cross-country differences between multinational corporations (MNCs)

home and host countries with regard to their regulatory, normative,

and cognitive aspects (Konara & Shirodkar, 2018; Scott, 1995). Extant

literature has deemed institutional distance as an important

determinant of MNCs' various decisions such as entry mode choice,

ownership,staffing, and so on in host countries which in turninfluences

the performance of foreign subsidiaries (Ambos & Håkanson, 2014;

Brouthers, 2002; Chao & Kumar, 2010; Dikova, 2009; Gaur, Delios, &

Singh, 2007; Gaur& Lu, 2007; Zaheer & Mosakowski, 1997). Notethat

though institutions refer to cognitive,normative, and regulatory institu-

tions (Scott, 1995),we confine our study to only the regulatory institu-

tional distance. One reason for that is that regulatory institutions are

mostly mandatory and therefore MNCs cannot take them for granted.

In other words,they will need to comply with them.Furthermore, regu-

lative institutions change more frequently and rapidly as compared to

normative and cognitive institution changes (e.g., cultural changes)

(Estrin, Baghdasaryan, & Meyer, 2009). Scholars have also argued that

investigating all three institutional distances in a study provides an

oversimplifiedanalysis (Zaheer, Schomaker,& Nachum, 2012).

DOI: 10.1002/tie.22178

Thunderbird Int. Bus. Rev. 2021;63:191–200. wileyonlinelibrary.com/journal/tie © 2020 Wiley Periodicals LLC. 191