Abstract

The purpose of this paper is to analyse the effects of institutional distance on foreign-owned subsidiarydevelopment. In particular, a distinction between direct and indirect effects of formal and informal institutionaldistance is proposed and empirically tested. Based on a bespoke census database of all known foreign-ownedsubsidiaries in the Northwest of England a postal survey has been conducted. The results indicate that informalinstitutional distance does have a pronounced negative effect on the level of intra- and inter-organisationalrelationships and decision-making autonomy in foreign-owned subsidiaries. The direct effect of formalinstitutional distance seems to be less relevant, however, it is becoming significant when the interaction betweenformal and informal institutional distance is considered. The specific contribution of this study lies in thesystematic and comprehensive investigation of the formal and informal institutional distance between home andhost country and their effects on subsidiary development. It is one of the first studies to provide a theoreticallysound investigation, based on new institutional economics and internalisation theory, of the interaction betweenformal and informal institutional distance in the context of foreign-owned subsidiaries.

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