Institutional Misalignment as a Cost of Doing Business Abroad: Varieties of Capitalism Approach

Cost of Doing Business Abroad (CDBA) is an important construct in International Business. The variety of causes leading to the CDBA has been the subject of and many scholars’ examinations. Extending CDBA to an institutional level, we develop a new perspective on the CDBA by incorporating institutional misalignment between the home and the host country as a cause of CDBA. We propose that institutional misalignment should be considered as a component of the CDBA. Using the theoretical lens of Varieties of Capitalism (VoC), we explain why and how institutional misalignment can create additional cost for MNEs operating in foreign countries. Specifically, we discuss how the differences between institutional configurations of the home and the host country create institutional misalignment. Furthermore, we explain why institutional misalignment is inevitable as MNEs cross national borders and how it incurs economic as well as social cost that MNEs may not be aware of. By doing so, we extend the CDBA research to a national level of analysis and showed that a set of firms from a nation can lose its national comparative institutional advantage as they cross national borders. Finally, we assert that the larger the institutional distance between the two countries, the greater the institutional misalignment is.