Dealing with Institutional Distances in International Marketing Channels: Governance Strategies That Engender Legitimacy and Efficiency

Zhilin Yang, Chenting Su, & Kim-Shyan Fam

Dealing with Institutional Distances in International Marketing Channels: Governance Strategies That Engender Legitimacy and Efficiency

Firms doing business in foreign institutional environments face pressures to gain social acceptance (commonly referred to as legitimacy) and difficulty in evaluating market information, both of which undercut firm performance. In this article, the authors argue that firms can design governance strategies to deal with foreign institutions to secure both social acceptance and firm performance. Using a Chinese sample of manufacturers that export products to various foreign markets through local distributors, the authors develop and test a model that bridges the effects of institutional environments and governance strategy on channel performance. Specifically, they find that firms can use two governance strategies, contract customization and relational governance, to deal with both legitimacy and efficiency issues and to safeguard channel performance. Thus, international channel managers are advised to maintain an integrated management of legitimacy and efficiency in foreign marketing channels.

Keywords: institutional distance, legitimacy pressure, market ambiguity, contract customization, relational governance, firm performance

Zhilin Yang is Associate Professor of Marketing (e-mail: mkzyang@ cityu. edu.hk) and Chenting Su is Professor of Marketing (e-mail: mkctsu@ cityu. edu.hk), College of Business, City University of Hong Kong. Kim- Shyan Fam is a Professor, School of Marketing & International Business, Victoria University of Wellington (e-mail: [email protected]). The authors thank Daniel Bello, Thomas Kramer, Thomas Madden, Shaohan Cai, Michael Hyman, David Tse, and Jan Schumann for their helpful com- ments on previous versions of this article. They also thank the three anonymous JM reviewers and Ajay Kohli for their invaluable guidance. The first two authors contribute equally. The authors gratefully acknowledge two grants from the Research Grant Council of Hong Kong SAR (9041618 and 9041715) and a grant from City University of Hong Kong (CityU SRG Project No. 7008124) for financial support. Ajay Kohli served as area edi- tor for this article.

Journal of Marketing

41 Volume 76 (May 2012), 41–55

For years, we have attempted to learn the business practice in our clients’ country through the lengthy, sometimes painful contracting process. You know, once we build up good relationships with our local distributors, they usually are willing to help us understand the local market environments and adapt our business practice to the local standards for survival.

—Chinese export manager

F irms managing international marketing channels face

different institutional environments that necessitate firm conformance to local business practices to gain

social acceptance (commonly referred to as legitimacy) (Eden and Miller 2004; Scott 2008). In addition, foreign institutions blur market information, which leads to firm difficulty in evaluating foreign markets (Martinez and Dacin 1999). Gaining social acceptance, however, may undercut firm efficiency (i.e., firm performance) because firms must invest to understand the local market and develop coopera-

tive relationships with local distributors (Eden and Miller 2004; Zaheer 1995). Thus, firms doing business in foreign markets face a managerial challenge—namely, how to gain legitimacy while safeguarding efficiency.

Prior research has not investigated this managerial dilemma in an international marketing context. Neoinstitu- tional theorists provide a one-sided solution—that is, firm conformity to gain social acceptance for survival, regardless of firm self-interests (Oliver 1991; Scott 2008). In this article, we provide a governance solution and argue that firms can design novel governance strategies to deal with foreign institutions. We address two essential research questions: (1) What are the effects of institutional distances (i.e., the differences between the host and home institutional environments) on firm pursuit of local social acceptance? and (2) Can governance strategies, such as contracts and relational governance, function to gain both social acceptance and firm performance? To answer these research issues, we introduce the notion of institutional distance as being based on the subdimensions of regulatory, normative, and cultural-cognitive distances in the context of international marketing channels.

Our key finding is the identification of interfirm governance strategies that can serve the dual purposes of enhancing legitimacy and efficiency in host marketing channels. Specifically, we find that firms facing legitimacy pressure and market ambiguity are motivated to use contract customization and/or relational governance to cope with their legitimacy and efficiency concerns. Both contractual and relational governances function to facilitate organizational learning and relational closeness with local partners, Our key finding is the identification of interfirm governance strategies that can serve the dual purposes of enhancing legitimacy and efficiency in host marketing channels. Specifically, we find that firms facing legitimacy pressure and market ambiguity are motivated to use contract customization and/or relational governance to cope with their legitimacy and efficiency concerns. Both contractual and relational governances function to facilitate organizational learning and relational closeness with local partners,

from market uncertainties. It is primarily an intrafirm solu- governance strategies safeguard firm performance. Thus,

tion and thus is not applicable to governance between firms. we link transaction cost economics (TCE) to an institutional

Contract customization refers to the extent to which trans- perspective to shed light on such a legitimacy–efficiency

action terms and clauses are tailored according to market challenge in international marketing channels.

conditions and transaction characteristics with a particular We organize this article as follows: First, we present our

partner (Poppo and Zenger 2002; Zhou, Poppo, and Yang conceptual framework and research hypotheses that bridge

2008). Relational governance relies on trust and social iden- institutional and efficiency-based effects on channel perfor-

tification, which creates shared behavioral expectations, mance. Second, we describe the research method and test

such as flexibility, information sharing, and solidarity our model using a Chinese sample of manufacturers that

(Heide and John 1992).

export products to various foreign markets through local This study posits that the latter two interfirm gover- distributors. Finally, we discuss the implications of the find-

nance strategies that aim to secure external support and ings and provide directions for further research.

resources for firm performance can each function to mitigate both the perceived legitimacy pressure and market

Conceptual Framework and ambiguity in a host market. We present our conceptual

framework in Figure 1 and develop research hypotheses in

Hypotheses

light of the framework.

Firms engaging in foreign marketing channels are con- strained by a set of foreign institutions encompassing rules,

Institutional Distance and Its Key Consequences

routines, conventions, and normative pressures (Oliver Scott (2008) maintains that institutions possess three pillars: 1996; Scott 2008). They face two main challenges that

regulatory, normative, and cultural-cognitive. The regula- undercut firm efficiency. First, they cannot foresee what

tory pillar pertains to a nation’s laws and regulations and will happen in the market because they are unfamiliar with

delineates what organizations can or cannot do. It uses legal the foreign institutional environments and are unable to

sanctioning as the basis of legitimacy (Scott 2008). The evaluate market-related information (Eden and Miller

normative pillar consists of beliefs, values, and norms that 2004). Second, their potential host partners do not recog-

define desirable goals and expected behaviors to achieve nize them as socially fit partners because the locals do not

them in a society. The legitimacy of normative institutions know and trust them (Kostova and Zaheer 1999; Kumar and

relies on societal beliefs and norms that specify what people Das 2007). In other words, institutional distances in a for-

should or should not do (Eden and Miller 2004; Scott 2008). eign market give rise to market ambiguity and legitimacy

Rooted in cognitive psychology, the cultural-cognitive insti- pressure, both of which directly or indirectly affect firm

tution emphasizes two important aspects of the shared efficiency.

knowledge, taken-for-granted conventions, and customs in How to cope with both legitimacy and efficiency issues

a specific industry: (1) managers’ internal interpretive busi- in foreign markets represents an underresearched area in

ness practices, which is shaped by external cultural frame- international marketing. Typical institutional solutions

works, and (2) their business knowledge, which is devel- emphasize firm conformity to gain legitimacy, regardless of

oped over time through repeated social interactions firm self-interests (Scott 2008); in this article, we argue for

(DiMaggio and Powell 1991; Kostova and Roth 2002). The governance solutions because they address the issue of effi-

legitimacy of this pillar is anchored in cultural orthodoxies ciency (Williamson 1991). Theorists in TCE have proposed

that specify what people will typically do (Scott 2008). three governance strategies: hierarchy, contract, and rela-

Using Scott’s (1995) institutional framework, Kostova tional governance (Heide 1994; Ouchi 1980). Hierarchy

(1997) advances the concept of “institutional distance” and

FIGURE 1 Conceptual Model

Normative Channel Performance

42 / Journal of Marketing, May 2012 42 / Journal of Marketing, May 2012

information in the host institutional environments (Martinez tries. Consistent with Martinez and Dacin (1999) and prior

and Dacin 1999; Scott 2008). Note that such market ambi- studies (Scott 2008; Williamson 1985), we identify the two

guity arises when firms lack knowledge and understanding key consequences of institutional distances as (1) legitimacy

of the foreign institutional environments; it represents one pressure to achieve acceptable business practice and (2) mar-

type of firm-specific uncertainty in which firms may differ ket ambiguity caused by foreign institutional environments.

in their perceptions of the same institutional environments Legitimacy pressure . First, institutional distances give

(Beckman, Haunschild, and Phillips 2004). rise to legitimacy pressure, which, as perceived by the

Specifically, market ambiguity occurs when a manufac- entrant firms, is the degree to which firms are pressed to

turer conducts business with a foreign distributor with dif- adopt acceptable business practices for survival in a host

ferent, seemingly unclear regulations, norms, and culturally market (Scott 2008). Lack of legitimacy implies a lack of

distinctive business practices. Thus, the firm is unable to social support and resources from the local stakeholders

evaluate market-related information such as market trends because of a low recognition (Scott 2008). Thus, when con-

and partner behavior. For example, Chinese managers may sidering firm social acceptance, the foreign channel man-

be less confident in interpreting and evaluating market agers are concerned about unfamiliar aspects of the foreign

information and predicting future market trends in a host legal codes and practices to avoid misbehaviors in the host

country because they are unclear about how the foreign country (Grewal and Dharwadkar 2002). For example, Chi-

regulations and laws shape economic transactions (Luo nese managers must be cautious about gift giving because it

2005). Similarly, the foreign norms and codes of behaviors may violate antibribery laws in Western markets.

in a host market add to market ambiguity and make it diffi- Second, normative distance may influence entrant firms’

cult for the entrant to judge the local channel member’s normative legitimacy by affecting the way they embrace

market actions and behaviors (Williamson 1985). For socially accepted norms and behaviors to avoid societal and

example, as mentioned, Western managers may be puzzled professional sanctions (Selznick 1984). For example, Chi-

by guanxi practices and thus unable to determine the proper nese managers may try to gain long-term developments by

relationship behavior in China (Park and Luo 2001). Fur- sacrificing short-term profits in their pricing decisions,

thermore, foreign cultural-cognitive structures may hinder which may affect their cooperative relationships with the

the managers’ ability to understand local consumer behav- host partners (Luo 2005). To gain normative legitimacy,

ior and interpret market information. Thus, we propose the therefore, a firm is pressed to participate in local channel

following:

decision making and share local business standards and practices.

H 2 : Market ambiguity is positively affected by (a) regulatory Third, cultural-cognitive distance may affect firms’ distance, (b) normative distance, and (c) cultural-cognitive

distance.

social legitimacy through social interactions in which cultural cognitions and knowledge are embedded (Scott 2008). Although a firm’s boundary agents may hold different

Governance Strategies

beliefs, they are strongly motivated to gain social legitimacy Perceived legitimacy pressure and market ambiguity due to by developing friendships with local channel partners. For

institutional distances invoke interfirm governance strategies, example, although many Western managers doing business

such as contract customization and relational governance, in China find it difficult to assimilate the implicit “doctrine

to safeguard firm performance in a host market. Contract of the mean” that underlies the practice of guanxi (i.e., inter-

customization enhances organizational learning, thus facili- personal relationships) (Park and Luo 2001; Su and Little-

tating cultural assimilation (Luo 2002). Relational exchange field 2001), they may not hesitate to adopt guanxi strategies

helps build trust that transforms foreign firms into “insid- to gain broader access to the vibrant China market.

ers” to gain both legitimacy and market information (Mar- Field interviews with Chinese exporting managers attest

tinez and Dacin 1999). We argue that the two interfirm gov- to such concerns with survival associated with the per-

ernance strategies can function to deal with both efficiency ceived legitimacy pressure in foreign markets. Specifically,

and legitimacy issues in international channel management. labor policies, environmental protection regulations, indus-

Contract customization . Lack of legitimacy in a host try norms, relationship building, working habits, and pro- market implies conflict in business conduct with significant fessional knowledge about channel management in a host stakeholders because of distrust (Oliver 1996), which incurs market are among the more difficult things for these man-

agers to understand. Therefore, we propose the following: additional transaction costs for entrant firms (Eden and Miller 2004; Zaheer 1995). A customized contract with the

H 1 : Legitimacy pressure is positively affected by (a) regulatory local partner creates tailored obligations, responsibilities, distance, (b) normative distance, and (c) cultural-cognitive

benefits, and arbitration arrangements ex ante to ward off distance. risks of misunderstandings (Joskow 1990; Luo 2005). In

Market ambiguity . Institutional distances also increase practice, managers of entrant firms tend to co-opt the source market ambiguity, which in turn affects firm efficiency

of the pressure by forming contractual bonds with the local (Williamson 1985). To differentiate such institutionally

distributors and significant stakeholders to enhance social induced market ambiguity from other types of market

acceptance (Oliver 1991). For example, an interviewed Chi- uncertainties, we define it as the degree of difficulty in

nese manager commented that such customized contracts

Institutional Distances in International Marketing Channels / 43 Institutional Distances in International Marketing Channels / 43

From the viewpoint of organizational learning, a customized contract also helps the suppliers learn acceptable business practices in a foreign market. When facing high legitimacy pressures, firms are motivated to gain local knowledge through the interactions embedded in contract drafting and negotiations. Such face-to-face communication often provides good opportunities for firms to learn local business norms, beliefs, and thinking styles. One Chinese manager commented that a detailed contract with customized terms and clauses helped her prevent wrongdoings and mistakes in the host market. In this sense, Argyres and Mayer (2007) argue that designing a customized contract produces a competitive capability by knowing how to adapt to each partner’s needs and conditions. Thus, legitimacy pressures in a host market motivate contract customization, which functions to facilitate mutual adaptation, mitigate dissimilarities between the entrant and the local partner, and ensure the former’s conformance to secure legitimacy. Thus:

H 3 : Contract customization is positively influenced by legitimacy pressure.

Next, we hypothesize that market ambiguity also affects contract customization. As we noted previously, market ambiguity in a host market arises when foreign firms lack institutional knowledge about the host market. This lack of knowledge and understanding by the entrant firm implies an information asymmetry between the firm and its local partners because the local partners are better informed about the institutional aspects of the local market (Heide 1994). Such market ambiguity encourages opportunism because the foreign firm is unable to observe and/or verify its local partners’ actions. Thus, its partners have incentives to limit their efforts to fulfill the agreement, leading to undetected self-interest-seeking behavior (Williamson 1989).

In the presence of market ambiguity, a customized contract functions as an ex ante safeguard against partners’ opportunism because it legitimizes monitoring and adds more term specificity and contingency adaptability to the contract (Carson, Madhok, and Wu 2006; Luo 2002; Wathne and Heide 2000). For example, a customized contract enables firms to accurately measure and reward pro- ductivity (Mooi and Ghosh 2010; Poppo and Zenger 2002) and avoid performance risk by modifying goals, activities, and arbitration arrangements in advance (Oliver 1991). Our field interviews indicated that a majority of Chinese channel managers, who perceived ambiguous market conditions and practices in a host market, proactively solicited a customized contract from their host partners to avoid performance ambiguity and safeguard their interests. Thus, we propose the following:

H 4 : Contract customization is positively influenced by market ambiguity.

Relational governance . Envisioning the disadvantage of doing business in a host market, the foreign channel managers may try to establish relational bonds with the local

44 / Journal of Marketing, May 2012

partner to enhance social legitimacy. As strangers in a foreign country, firms bear the predetermined “liability of for- eignness” that prevents them from doing business in an efficient way (Eden and Miller 2004; Zaheer 1995). To become insiders, firms, particularly manufacturers from emerging markets, are strongly motivated to build relationships with foreign distributors through cooperative actions, such as joint planning and the hiring of local personnel, to develop trust and gain local knowledge (Peng 2003; Xu and Shenkar 2002). Moreover, relational behaviors, such as information sharing, flexibility, and solidarity, provide a foundation for both sides to internalize and formalize their operations into legitimized practices (Heide and Wathne 2006; Poppo and Zenger 2002). Such embedded ties enhance the entrant firms’ ability to learn, understand, and adapt to the business practices of their trading partners’ country (Oliver 1996). For example, Western firms doing business in China are motivated to adopt guanxi practices to become friends with their local partners. In other words, relational governance can facilitate the process by which firms mimic their channel partners to gain social acceptance.

H 5 : Relational governance is positively influenced by legitimacy pressure.

Finally, market ambiguity may also encourage relational governance. As we mentioned previously, such institutionally induced market ambiguity is firm specific because firms may possess different levels of knowledge about the same foreign institutional environments. Typically, when firms enter a new market or deal with an external partner, they experience uncertainty that is unique and internal to them (Greve 1996).

Previous empirical studies indicate that these firms are motivated to develop more extensive relational bonds, such as interlocking and alliance networks, with local partners to explore additional information (Beckman, Haunschild, and Phillips 2004). New information helps them make more informed decisions to deal with firm-specific uncertainty. This logic is consistent with Ouchi’s (1980) argument for clan-based governance, in which firm goals are aligned and cooperation is motivated on the basis of trust. In this clan- like dyad, partners are “insiders” that exchange tacit knowledge and private information to shed light on each other’s ambiguous areas (Ouchi 1980). As such, foreign firms experiencing market ambiguity may become insiders by adopting relational governance to foster interfirm information sharing, flexibility, and solidarity. Our field interviews indicated that Chinese exporting managers are strongly motivated to build guanxi with their local distributors to develop trust, which provides them with more access to the tacit knowledge and information about the local market, such as market trends and conventions of channel operations. Therefore, we propose the following:

H 6 : Relational governance is positively influenced by market ambiguity.

Channel Performance

Given that perceived legitimacy pressure and market ambiguity affect efficiency, firms may also use governance strat- Given that perceived legitimacy pressure and market ambiguity affect efficiency, firms may also use governance strat-

firm performance.

influence on performance outcomes. As we argued previ- H 7 : Channel performance is positively affected by (a) contract ously, the process of creating the agreement assists in devel-

customization, (b) relational governance, and (c) their oping more robust interfirm communication based on a set

interaction effects.

of shared rules, procedures, responsibilities, and expectations, which in turn help clarify institutional misunderstandings and reduce adaptation costs (Mooi and Ghosh 2010).

Methodology

With a contact, both parties are likely to devote attention to contractual arrangements and work out any issues before

Data Collection

they become serious, thus saving transaction costs We tested the hypotheses using a sample of Chinese manu- (Williamson 1985; Zhou, Poppo, and Yang 2008).

facturing firms that export products to various countries Conversely, relational governance leads channel mem-

through foreign distributors. We undertook a systematic bers to relational norms, in which they solve problems

random sampling of 1480 manufacturers, based on a list of together, share fine-grained information, and provide flexi-

manufacturing firms in the four-digit Standard Industrial bility or make adequate adaptations for conditions in which

Classification codes 2011–3899 and located in Beijing, unusual events might occur (Heide and John 1992; Zhou,

Guangzhou, and Shanghai. A national market research firm Poppo, and Yang 2008). Consequently, economic transac-

headquartered in Shanghai with nationwide branches and tions in a host market may reduce both negotiation and con-

affiliates was commissioned to conduct the survey through tract costs by enhancing shared expectations and market

personal interviews.

information costs by providing insider status (Luo 2002; For the purpose of this research, we established three Mooi and Ghosh 2010).

criteria to select qualified companies. First, the company We further argue that contract customization and

must be neither foreign owned nor a joint venture, and its relational governance may serve as complements in a

senior managers must be native Chinese. We thus reduced foreign market (Poppo and Zenger 2002). Prior research has

the dual effect that might result from cross-cultural manage- postulated that trust may supplant contracts in suppressing

ment on evaluations of institutional distances (Kostova and opportunism, whereas contracts may also undermine

Roth 2002). Second, the company should have an overseas distributor that purchases parts or components at least twice

relational norms. Thus, contracts and relational governance function as substitutes (Gulati 1995; Macaulay 1963).

a year. Third, the distributor should not belong to the same company/group or parent company to exclude vertical inte-

However, as we argued previously, the two governance gration. Qualified senior managers were first contacted by strategies both function to facilitate organizational learning telephone to solicit their cooperation. Of the 600 companies and secure external support and resources for firm perfor- whose managers verbally agreed to participate, 436 man- mance. Contract customization facilitates cultural assimila- agers from 218 firms were successfully interviewed on-site. tion through organizational learning (Luo 2002); relational For each firm, we selected two senior managers (e.g., exchange transforms foreign firms into insiders to gain both

chief executive officer, vice president of sales, export legitimacy and market information (Martinez and Dacin

manager) as key informants because of their revealed heavy 1999). When trust develops, foreign distributors are more

involvement with their firms’ major distributors. These willing to comply with terms contained in contracts, and

informants first selected the overseas distributor with which when contracts are well customized, opportunism is less

their firm conducted the greatest volume of business. They likely to occur. Thus, the effect of a given governance strat-

then answered the survey questions according to their rela- egy on firm performance is greater when it functions in

tionships with the chosen distributor. All subjective infor- conjunction with another governance strategy rather than in

mation, such as perceived institutional distances, relational isolation (Poppo and Zenger 2002).

governance mechanisms, and the performance measure, Specifically, when the contractual terms and clauses are

was based on multiple informant data. In line with Kumar, well specified and articulated, firms operate in a context of

Stern, and Anderson (1993), respondents provided data only information symmetry and perceived fairness; a trusting,

on the attributes they believed they had the ability to evalu- interfirm relationship coupled with such a customized con-

ate. The mean confidence scores for knowledge about the tract leads to a lower likelihood of contract breach and/or

institutional environments of the country in which their dis- renegotiation, saving ex post transaction costs (Luo 2002;

tributor was located and the interfirm relationships were Mooi and Ghosh 2010). In contrast, when firms develop

4.21 (on a five-point scale; SD = .68) and 4.29 (SD = .68), relational bonds with their local partners, a customized con-

respectively. For items with data from two informants, we tract coupled with relational norms provides a roadmap for

pursued the response data-based weighted mean approach fulfilling mutually agreed-on responsibilities and dealing

to determine a value for each item (for detailed procedures, with necessary adaptations in an exchange, leading to lower

see Van Bruggen, Lilien, and Kacker 2002). opportunism and saved monitoring costs (Luo 2002;

Through preliminary data screening, we deleted 13 Williamson 1991). Studies have also shown that customized

firms because the respondents did not know or held back contracts function to reduce opportunism only in conjunc-

vital information related to either their interfirm relation- tion with relational closeness (e.g., Mooi and Ghosh 2010).

ships or the institutional environments of the distributor’s In other words, in a foreign market, contract customization

country. Thus, we had 205 useful responses, for a response

Institutional Distances in International Marketing Channels / 45 Institutional Distances in International Marketing Channels / 45

The final sample consisted of 205 firms across the major Standard Industrial Classification groups within the manufacturing division, spanning various industrial sectors. Of the companies, 82% had annual sales revenues of more than US$3 million, and 62.3% employed between 100 and 500 people. In addition, 35.6% of the sampled firms were state owned, 48.2% were private, and 16.2% were listed stock companies. These companies exported to 14 regions/ countries, including Germany, Japan, South Korea, Taiwan, the United States, Hong Kong, Singapore, Malaysia, the United Kingdom, Australia, Canada, France, Thailand, and the Philippines. The first 9 countries are among China’s top trading partners.

Measures

Except for institutional distances, legitimacy pressure, and market ambiguity, we adapted all the multi-item measures used in the survey from established studies. Two researchers educated in both the United States and China translated and back-translated all the measures to ensure conceptual equiv- alence (Hoskisson et al. 2000). To further ensure content and face validity of the measures, we made personal trips to conduct five in-depth interviews with senior export managers arranged by the market research firm. On the basis of their responses to the relevance and completeness of the measures, we revised a few questionnaire items to enhance clarity. In addition, we conducted a pilot study with 50 export managers, in which the respondents both answered the questionnaire and provided feedback on the design and wording of the questionnaire. As a result, we modified sev- eral items in line with the feedback from the export managers. We present these measures in the Appendix.

Institutional distances . Institutional profiles tend to be issue specific and difficult to generalize across domains (Busenitz, Gomez, and Spencer 2000; Kostova 1997; Kos- tova and Roth 2002). Thus, we adopted Kostova’s (1997) approach and developed an instrument to measure the three perceived institutional distances in the eyes of the channel managers. First, regulatory distance pertains to laws and rules that influence business strategies and operations in marketing channels, reflecting regulatory processes such as rule setting, monitoring, and sanctioning activities (Scott 1995). We drew a list of ten regulatory-related institution items from the Global Competitiveness Report, which is published annually by the World Economic Forum and has been increasingly used in studies on international business (Delios and Beamish 1999). Using feedback from the personal interviews with senior managers, we selected six items most relevant to the regulatory aspects of channel management. These items pertain to enforceability of business laws, impartiality of arbitration, disputes settlement, intellectual property protection, institutional stability, and number of regulatory bodies of enforcement.

46 / Journal of Marketing, May 2012

Second, normative distance refers to the differences in values and norms toward practices of channel management between two countries. Although prior research has used Hofstede’s (1980) dimensions of culture as a proxy of the normative environment, we concur with Kostova’s (1997) claim that it is better to develop a measure specific to channel management. Drawing from the findings of our focus group studies and literature review, we adapted five items to repre- sent norms and values relevant to channel management practice: norms of cooperation among channels, societal-level trust, association intensity, moral obligation to provide quality products and services, and standards of business conduct.

Third, cultural-cognitive distance refers to social knowledge and skills that professionals possess and share in oper- ating channels (Busenitz, Gomez, and Spencer 2000). To measure the channel professionals’ knowledge and skills, we used the following aspects: channel management practice, ability to implement programs of efficient channel management, customs of channel operations, business environment related to channel management, and shared beliefs in the area of transnational channel management. All items of the three distances except one reached a factor loading of .70 or greater. We eliminated the item with a low factor loading (i.e., institutional stability from the regulatory perspective) from further analysis.

Legitimacy pressure . In line with the definition of legitimacy (Suchman 1995), we measured legitimacy pressure by asking export managers to evaluate the degree to which their trading partners pressure them for (1) desirability, (2) properness, and (3) appropriateness of business practice in accordance with the institutional environment in a foreign market. We conceive market ambiguity as being institution-

ally induced. 1 Following Martinez and Dacin (1999), we operationalized market ambiguity as the difficulty of pro- cessing market information because of the host institutional environments. We explicitly asked the respondents to con- sider this construct in the host institutional environments to capture the tacit nature of such uncertainties. Three items measure the essential aspects of market ambiguity: information analysis, interpretation, and evaluation.

Governance strategies . We measured contract customization using three items, adapted from Cannon and Perreault (1999), that reflect the specificity, formality, and details of contractual agreements between manufacturers and their foreign distributors. Relational governance is based on the use of shared norms to monitor and coordinate the behaviors of the exchange partners (Macneil 1980), and therefore we operationalize it as a three-dimensional construct consisting of information sharing, flexibility, and solidarity (Heide and John 1992; Jap and Ganesan 2000; Zaheer and Venkatra- man 1995). Consistent with Jap and Ganesan (2000), we measured relational governance as a higher-order factor.

1 To ensure an unbiased measure, we conducted follow-up telephone interviews with 65 managers who had previously partici-

pated in our study. We asked them to indicate the degree of market ambiguity using our measurement items but without mentioning “due to the host institutional environments.” The correlation between the two measures is .83, indicating measurement validity.

Channel performance . We adopted Bello and Gilliland’s (1997) export channel performance measures, which encom- pass three aspects: strategic, selling, and economic performance. Strategic performance pertains to the firm’s marketing, distribution, promotion, and pricing strategy for foreign markets. Selling performance involves maintaining contact with customers, calling on customers in person, and servic- ing customers after the sale. Economic performance consists of economic, sales, growth, and profit goals for foreign markets. Following Bello and Gilliland’s approach, we averaged the items for each construct to form three performance scales, which served as the indicators of the export channel performance. We tested the unidimensionality of each performance construct and the model fit using a three-construct confirmatory factor analysis (CFA). Consistent with Bello and Gilliland’s study, we find that the three-construct approach represents channel performance well (see the Appendix).

Controls . We controlled for four sets of variables. First, we controlled for three types of exchange characteristics according to TCE: asset specificity, environmental volatility, and transaction frequency (Heide 1994; Poppo and Zenger 2002; Williamson 1985). We adapted items from Heide and John (1992), John and Weitz (1989) and Cannon and Per- reault (1999), and Anderson (1985), respectively, to measure the three constructs. Second, we controlled for firm size, measured as the number of employees in a company, because it may significantly influence organizational behaviors and decisions. Third, prior studies have shown that transaction history is essential to the relationship between organizations and the development of cooperative norms (Gundlach and Murphy 1993). We used partners’ number of years in business together to indicate history of transaction. Fourth, we controlled for the effects of state- owned manufacturers, an important institutional factor in China (Park and Luo 2001), using a dummy variable that equals 1 if the firm is state owned and 0 if otherwise.

Construct validity . We refined the measures and assessed their construct validity following the guidelines Anderson and Gerbing (1988) suggest. First, we ran exploratory factor analyses for each multiple-item variable, which resulted in factor solutions as theoretically expected. Second, reliability analyses show that these measures possessed satisfactory coefficient reliability. Third, we ran CFA for each of the three sets of constructs (i.e., institutional distances; legitimacy pressure, market ambiguity, and governance strategies; and performance and controls), as well as an overall 15-factor model with all the variables. The confirmatory models all fit the data satisfactorily (see the results of the CFA in the Appendix), indicating the unidimensionality of the measures (Anderson and Gerbing 1988). All factor loadings were highly significant (p < .001), and the composite reliabilities of all constructs were greater than .70 (Bagozzi and Yi 1988). Thus, these measures demonstrate adequate conver- gent validity. Table 1 presents the means, standard deviations, and correlations of the constructs.

We assessed the discriminant validity of the measures in two ways. First, none of the confidence intervals of the cross- construct correlations contained a value of 1 (p < .01), signi- fying the discriminant validity of these measures (Anderson

Institutional Distances in International Marketing Channels / 47

and Gerbing 1988). Second, we ran chi-square difference tests for all the multiple-item scales in pairs (38 tests) to test whether the restricted model (the correlation fixed to 1) was significantly worse than the freely estimated model (the correlation estimated freely). All the chi-square differences were highly significant (e.g., in the test for distributor

importance and contract customization:  2 (1) = 165.24, p = .000), providing additional evidence for discriminant validity (Anderson and Gerbing 1988). Overall, the measures in this study possess satisfactory reliability and validity.

Common Method Bias Assessment

For the subjective measures in our study, we used two informants to increase the reliability and validity of the measures (Kumar, Stern, and Anderson 1993). However, common method variance may still exist when, in some cases, one respondent provides answers to most of the variables (Pod- sakoff et al. 2003). When this happens, any unusual variance resulting from the respondent may be reflected in all the measures. In addition to the procedural controls for the survey, such as anonymous submission and minimization of the ambiguity of the measurement items, we employed the marker variable assessment technique approach that Lindell and Whitney (2001) recommend to assess common method bias. We added an item pertaining to product technical complexity (from not technically complex to extremely technically complex), which had either no significant or very low correlations with the variables in our study. The results of a partial correlation analysis after we controlled for the effect of product technical complexity show no significant change among the important constructs. Finally, of the 36 correlations between the nine constructs in the model, 8 were not significant, and 4 of these 8 were negative, indicating the validity of the other correlations (Lindell and Brandt 2000). Our collected evidence suggests that the effect of common method variance is unlikely to be significant.

Results

Level of Analysis

Institutional distance involves two levels: national and organizational. We tested the proposed model by observing institutional distances at the organizational level, based on theoretical reasoning (Kogut and Singh 1988; Meziasa et al. 2002; Straub et al. 2002) and statistical implications (Hox 2002; Meziasa et al. 2002). Theoretically, institutional distances measured at the organizational level and reported by managers reveal the managers’ perceptions of their business environments and their account of national differences in institutions. Managers’ perceptions subsequently affect their decision making (Straub et al. 2002). Therefore, we view institutional distance as an organization-level construct (i.e., a manager’s perception of institutional distances). Statistically, we collected one-sided data from only one context (China). Because there is only one type of variance, there are no contextual effects that bias ordinary least squares (OLS) results (Bickel 2007).

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TABLE 1 Means, Standard Deviations, and Correlations for the Constructs

Construct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

1. Regulatory distance

2. Normative distance

3. Cultural-cognitive distance

4. Asset specificity

5. Environmental volatility

6. Transaction frequency

7. Contract customization

8. Relational governance

9. Distributor importance

10. Legitimacy pressure

11. Market ambiguity

12. Channel performance

13. Manufacturer type

14. Location of partners

–.03 . — 16. History of transaction

15. Technical complexity

–.05 . — 17. Firm size

.50 .85 1.06 1.57 Notes: p < .05 for | r | ≥ .150 (two-tailed); p < .01 for | r | > .210 (two-tailed). The reliability of each measure is depicted in boldface on the diagonal. Sample size N = 205.

Endogeneity Tests

.38, for regulatory, normative, and cultural-cognitive dis- Because managers were not randomly assigned to various

tance, and p < .05, .01, and .01, respectively). The compari- export-partner countries in which they reported their per-

sons of the OLS and IV estimates show that endogeneity ceptions of legitimacy pressure and market ambiguity, both

exists for legitimacy pressure but not for market ambiguity. constructs may be correlated with unobserved factors (e.g.,

When we regressed legitimacy pressure on the three dis- managers’ selection of exporting products) other than the

tances, the coefficients of IV estimates were significantly three institutional distances. Such omitted variables cause

larger than those of the OLS estimates. Thus, to address the endogeneity problems that produce biased and inconsistent

endogeneity of legitimacy pressure, we include the IV in coefficient estimators (Wooldridge 2003). To address this

the subsequent model test.

concern, we employed the instrumental variable (IV) We tested our hypotheses using path analysis for two method by introducing one variable, location of trading

reasons. First, there are two formative constructs, relational partners; we measured it as a dummy variable that equals 0

governance and export channel performance. Therefore, it if the trading partner is located in Asia and 1 if otherwise.

is more suitable to use path analysis than the structural Location of trading partners meets the two requirements of

equation modeling approach. Second, our model consists of

a valid IV (Wooldridge 2003).

13 constructs with 205 effective samples; the ratio is less First, it is correlated with all three distances (see Table

than 15 per construct, the minimum number required for 1). Conceptually, geographic distance is associated with

structural equation modeling. In the path analysis model, institutional distances (Ghemawat 2001). Second, it is not

the constructs were represented with the average scores of correlated with error terms in the model. We followed

their indicators. For relational governance and channel per- Hausman’s (1978) approach and compared the OLS and

formance, we used the average score of each subconstruct two-stage least square estimates of both legitimacy pressure

as their indicator. The model also included the IV, location and market ambiguity to determine whether they are consis-

of trading partners, and the interaction between contract tent. Specifically, we regressed the three distances on the

customization and relational governance. The fit indexes instrument and then plugged the fitted values into the main

indicate satisfactory model fit for the path analysis model regression equations of legitimacy pressure and market

(see Table 2).

ambiguity. Location of trading partner’s country had a sig- As Table 2 shows, H 1 is supported, indicating that the nificant, positive effect on the three distances (  = .25, .32,

three institutional distances significantly affect legitimacy

TABLE 2 Results of Path Analysis

Hypothesis

Supported or Hypotheses Paths

Standardized

Expected Sign

Coefficients

Not Supported

Supported H 2 : Three institutional distances Æ market ambiguity

H 1 : Three institutional distances a Æ legitimacy pressure

Supported H 3 : Legitimacy pressure Æ contract customization

Supported H 4 : Market ambiguity Æ contract customization

Supported H 5 : Legitimacy pressure Æ relational governance

Supported H 6 : Market ambiguity Æ relational governance

Supported H 7a : Contract customization Æ performance

Not supported H 7b : Relational governance Æ performance

Supported H 7c : Contract customization ¥ relational governance Æ performance

Location of trading partners b Æ three institutional distances

Control Variables

Asset specificity Æ two governance strategies c .28*; .35* Market volatility Æ two governance strategies c .07; .19** Transaction frequency Æ two governance strategies c –.01; .08 Distributor importance Æ two governance strategies c .18*; .27** Relationship length Æ two governance strategies c .06; .14*** Firm size Æ two governance strategies c .02; .07 Manufacturer type Æ two governance strategies c .03; .05

Model fit indexes  2 = 340.85 (p = .00),  2 /d.f. = 4.01, RMSEA = .051, GFI = .93, CFI = .94, NNFI = .91

Dealing with Institutional Distances in International Marketing Channels: Governance Strategies That Engender Legitimacy and Efficiency

Zhilin Yang, Chenting Su, & Kim-Shyan Fam