Weaving Together the Normative and Regulative Roles of Government: How the Norwegian Sovereign Wealth Fund's Responsible Conduct Is Shaping Firms' Cross-Border Investments

Based on institutional theory, I extend research on the regulative role of national government in society, and suggest that government exerts important influences on firms‘ actions through the diffusion of norms. I suggest that by instituting the Council on Ethics which publicly ―censors‖ and ―certifies‖ the Norwegian sovereign wealth fund‘s cross-border investments, the Norwegian government contributes to the professionalization of responsible investment principles thus, playing a normative role in shaping firms‘ investments. Employing a quasi natural experiment, I find that focal Norwegian firms are more likely to make ―responsible‖ cross-border investments following the formation of the Council on Ethics in 2004 and the associated censorship announcements. Further, I find that the normative pressure for responsible investments is mediated by firms‘ imitation or overlap with the Norwegian sovereign wealth fund‘s investments. However, the mediated effect of normative pressure on responsible investments becomes weaker for government-owned firms. These findings highlight the importance of normative mechanisms through which government can influence firms‘ behavior, especially in contexts where regulatory authority may not hold. Moreover, these findings reveal the interplay among the normative, mimetic and regulative pressures, and the heterogeneity in the extent to which firms within the same country demonstrate institutional isomorphism.