The Role of Institutional Distance in the Target Firm Performance Cross Border Mergers & Acquisitions - Evidence from Emerging Economies Firms Investing in Developed Economies

This paper analyses the impact of institutional distance and target firm performance. Besides strategic assets and financial support, the importance of institutional difference between DEs and EEs should not be neglected for their influential impacts on firm performance. Good institutions implement constructive policies to shape and supervise business activities by both MNEs and domestic firms, such as Laws, policies to monitor financial institutions, policies to improve communication and transportation infrastructures, policies to support national economy and industries and policies to protect IPR, policies to invest in educational and R&D institutions (Dunning and Lundan 2008). Weak institutions cannot provide appropriate law system for investor and IPR protection. It also increases unpredicted risks to business activities. Qualified employees with high educational level are hard to find in weak market (Dunning and Lundan 2008, Tolentino 2010). Cultural difference may cause worries in target firm and lead to lose of valuable employee (Shimizu, Hitt et al. 2004, Slangen and van Tulder 2009). Little attention has been given on the institutional distance on firm performance. Therefore, we combined accounting measures and institutional distance to examine the short-term firm performance in CBMAs. Our empirical results shows that when DMNEs firm performance is positively related to large political, economic, administrative and knowledge distance, and negatively significant to cultural and geographic distance. Financial, demographic and global-connectedness distances are found to play an insignificant role.