Resumo

Institutional Distance (ID) significantly impacts Multinational Enterprises (MNEs) in their operations and strategic decisions. This study explores how subnational ID and proximity influence MNE performance in Brazil. Integrating IB theory with economic geography addresses the complexities within countries, particularly in emerging markets with significant regional disparities. This research provides insights for both academic and practical applications, offering a nuanced understanding of managing subnational institutional complexities.

This study delves into a crucial research problem: how spatial proximity, which refers to entities' physical or geographical closeness, mediates the relationship between subnational institutional distance and the performance of multinational subsidiaries in Brazil. The objective is to understand how this spatial proximity can mitigate the negative impacts of subnational institutional distance on MNE performance, providing empirical evidence and strategic insights to enhance MNE management in heterogeneous subnational environments.

Institutional Distance (ID) is a fundamental concept in International Business (IB) research, encompassing differences in regulatory, cognitive, and normative institutions between countries. Previous research has focused on national-level ID, neglecting subnational variations that influence MNE performance. This study proposes the concept of subnational ID to capture local differences and perceptions of Liability of Foreignness (LOF), which refers to the inherent disadvantages that foreign firms face in host countries, integrating IB theory with economic geography.

The study uses data from a survey of 316 foreign subsidiaries operating in Brazil. Structural path analysis and mediation modeling are employed to test the proposed hypotheses. The survey includes subsidiaries established before and after the 2001 FDI boom, marked by a significant increase in foreign direct investment in Brazil, capturing various experiences and entry modes. Proximity dimensions include institutional, organizational, cognitive, social, and geographical proximity, adapted from Boschma (2005).

The results indicate a significant negative correlation between subnational institutional distance and subsidiary performance, supporting H1. Furthermore, the mediation analysis shows that proximity significantly mitigates this negative impact, supporting H2. The proximity strategy allows MNEs to reduce the adverse effects of subnational institutional distance, resulting in better subsidiary performance.

Our findings unequivocally support the hypothesis that subnational institutional distance negatively impacts MNE subsidiary performance. However, the mediating role of proximity is essential, as it enhances MNEs' ability to access local knowledge, resources, and networks, thereby mitigating the negative impacts of subnational institutional distance. These insights offer valuable implications for academic research and practical strategies for MNEs operating in heterogeneous subnational environments, providing a solid foundation for future research and strategic decision-making.

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