STRATEGIC ORGANIZATION Vol 7(3): 339348

DOI: 10.1177/1476127009337439
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EDITORIAL ESSAY

Rethinking institutional distance:

strengthening the tie between new
institutional theory and international
management
Nelson Phillips Imperial College Business School, UK
Paul Tracey University of Cambridge, UK
Neri Karra Imperial College Business School, UK
Research in international management (IM) has long recognized the
importance of understanding the institutional differences between countries.
Indeed, a basic premise of much of IM research has been that firms are
embedded in country-specific institutional arrangements (Busenitz et al.,
2000: 994). One important strand of this literature focuses on institutional
distance: the difference/similarity between the regulatory, cognitive, and
normative institutions of . . . two countries (Kostova and Zaheer, 1999: 71).
However, the version of institutional theory that this work draws upon is
dated and narrow, and this limits the usefulness of the concept. In this essay,
we argue for a new conceptualization of institutional distance based on recent
developments in new institutional theory (see Greenwood et al., 2008).
More specifically, we argue that institutional distance should be reconceptualized in three ways. First, we argue that institutionalization is a matter
of degree and that low levels of institutionalization increase institutional
distance. Current conceptualizations of institutional distance fail to include
this effect. Second, we argue that including the concept of organizational
field allows for a multi-level analysis that incorporates subnational, national
and supranational institutional differences resulting in a better measurement.
Finally, we introduce the concept of institutional entrepreneurship to discussions of institutional distance. This provides an exciting new opportunity for
theorizing about the activities of firms involved in international activity.
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Institutional distance and uncertainty

In an effort to move beyond early thinking in IM that focused narrowly on
cultural difference, Kostova (1999) and Kostova and Zaheer (1999) argue
that it is not only cultural differences that are important, but also the institutional distance between countries. They build on Scotts (1995) three pillars
of institutionalism to define institutional distance as the extent to which
the regulative, cognitive and normative institutions of two countries differ
from one another. In this framework, the regulatory component reflects the
existing laws and rules that promote certain types of behaviour in a given
country. The cognitive element reflects commonly shared social knowledge
and practices. Finally, the normative pillar consists of beliefs, values and
norms that define the legitimate and expected actions in a society. The core
of their argument is that measuring the distance between two countries
on each of these institutional dimensions and estimating their effect on the
ability of a firm to transfer business practices and people between contexts
can help multinational corporations (MNCs) facilitate market entry and
obtain legitimacy in foreign countries.
The first key point for rethinking institutional distance is that institutionalization is not a binary concept. Rather, institutionalization is a
process and the result is a continuum of institutionalization and associated
mechanisms of self-reinforcement. It is therefore a matter of degree and
depends very much on whether or not an organizational field is forming,
stable or in crisis (Fligstein, 1997: 398).
This has important ramifications for institutional distance, which is
currently focused on the effect of the differences between home and host
countries:
From an institutional perspective, firms will refrain from investing in markets
that are institutionally distant, because business activities in those markets
require conformity to institutional rules and norms that conflict with those of
the home country. (Xu and Shenkar, 2002: 614)

In other words, high degrees of institutional distance will exist when there
are large differences between the institutional environment in the host and
home countries, and this will make it more likely that a firm will refrain from
entering the host country.
We believe that institutional distance should be broadened to include a
concern with the degree of institutionalization, or what we call institutional
uncertainty, in addition to the degree of difference. As firms internationalize,
they encounter not only institutional contexts where key institutions differ, but also contexts that are composed of institutions that are not well
institutionalized. While the host country, particularly if it is a developing
economy, may be characterized by an absence of a given institution or set
of institutions, it may also be characterized by institutions that while

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PHILLIPS ET AL.: RETHINKING INSTITUTIONAL DISTANCE

similar to the home country are only weakly entrenched. The low degree
of institutionalization results in a high degree of ambiguity and therefore a
greater degree of institutional uncertainty. This uncertainty has the effect
of increasing the complexity and risk for international business, thereby
increasing the institutional distance between the home and the host country.
Extending institutional distance to take account of institutional difference
and institutional uncertainty results in a more accurate measure of institutional distance.
But adding this second dimension does more than simply expand our
understanding of institutional distance, it allows us to categorize the different
forms of institutional environments faced by MNCs (see Figure 1). Rather
than just low or high levels of institutional distance, there are four distinct
types of institutional environments that a firm might encounter in a host
country. First, if both institutional uncertainty and difference are low, then
the level of institutional distance is low and the risk faced by firms moving
into this context is also low: firms can simply transfer their existing business
model to the new context. A German food services firm entering Austria
would be an example of this scenario.
The second case is more difficult for MNCs. If we move to the upper
left quadrant, we have a scenario where the differences between the two institutional systems are high while the uncertainty remains low. In this situation,
the institutional distance is moderate and firms must develop strategies for
managing it: firms need to adapt their business model so that it fits with the
new institutional context or else change the new institutional context so that
their current business model becomes viable. An example of this scenario
would include an Indian automotive manufacturer seeking to enter the US
market: the institutional context is quite different but highly institutionalized
and therefore predictable.
Third, moving to the lower right quadrant, we encounter a situation
where the difference between the home and host country institutional
Host country institutional uncertainty
Low

High

High

Adapt
Moderate risk,
complexity, effort

Avoid
High risk, complexity, effort

Low

Transfer
Low risk, complexity, effort

Hedge
Moderate risk,
complexity, effort

Host country
institutional
difference

Figure 1 A typology of MNC host country strategies

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environment is low but the institutional uncertainty of the host country is

high. In this case, the institutional context of the host country looks like the
home country, but it is not highly institutionalized and therefore firms again
face moderate institutional distance and moderate risk. In this case, the firm
must find a way to hedge the risk it faces from the institutional uncertainty in
the host country. This may involve, for instance, alliances with powerful local
actors, assurances from local governments and the use of export insurance. A
Spanish hotel business entering Chile is an example of a situation where the
institutional difference is low but the uncertainty is high.
Finally, the fourth case occurs when both the institutional difference
between the home and host country and the institutional uncertainty of the
host country are high. In this case, the institutional distance is high, with
very high levels of risk and complexity for MNCs: the combination of very
different and very uncertain institutions renders the host country unattractive,
and the likely strategy is to avoid this market. Firms that choose to enter
either because the potential rewards are high or because they have particular
competencies for managing these scenarios are liable to do so incrementally
in order to capitalize on learning effects. A British oil company entering
Russia constitutes a scenario where a firm would find itself facing high levels
of difference and uncertainty (as was recently experienced by BP).

Organizational fields and institutional distance

Institutional distance is commonly measured by comparing one country
institutional profile to another. However, this leads researchers to focus too
narrowly on the institutional context that characterizes a particular country.
While it is not necessarily incorrect to use this level of analysis, it may
not accurately represent the actual institutional context experienced by an
international firm. In fact, the country level is often not the most appropriate
level of analysis because economic activity occurs at many geographical
levels, having a variety of compositions (Fujita and Krugman, 2004: 3).
A multi-level approach should underpin the measurement of institutional
distance for the following reasons. First, the most relevant institutional context may be broader than a single country and may in fact be associated with
a supranational region. In this case, the institutional distance depends on
the firms home institutional context and its relationship to the broader
institutional context of the region in question. For example, as the business
practices and legal frameworks among EU member states have become more
similar to one another, many MNCs have chosen to treat the EU as one
region rather than a set of separate countries.
Second, while we do not believe the nation-state is necessarily the most
appropriate level of institutional analysis, we are not suggesting that it be
discarded. MNCs crossing national borders often find that the rules of the

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PHILLIPS ET AL.: RETHINKING INSTITUTIONAL DISTANCE

game with which they are familiar come into collision and sometimes even
are in contradiction with rules of the game dominant elsewhere (Djelic
and Quack, 2008: 315). Kostova (1997: 180) makes the point even more
forcefully when she argues that the institutional characteristics of a country
reflect that countrys environment in a relatively encompassing way, as they
capture various aspects of the national environment, including cultural norms,
social knowledge, rules, regulations, and others. Therefore, the country level
should be retained when appropriate, but researchers should be open to more
micro or more macro levels of analysis.
Third, the appropriate level of analysis may be more limited in scope than
the country level and vary widely across a particular economy; some parts of a
host countrys economy may be relatively similar to the home context, while
other parts may be very different. This highlights the fact that the nature of
the institutional context faced by MNCs often depends on the kind of business that they are engaged in. For example, an American manufacturing firm
wishing to enter the Dubai market for oil industry equipment will face a very
different degree and form of institutional distance than an American bank
wishing to enter the financial services industry in the same country. While
the oil industry is governed by a relatively generic set of international norms,
banking in the Islamic world operates on a fundamentally different set of
practices than in the US.
The concept of institutional distance would therefore be strengthened if
it was based upon a construct that was not geographically limited, that could
span multiple levels of analysis and that could incorporate important aspects
of these different levels. In institutional theory, this level of analysis has been
conceptualized as the organizational field. DiMaggio and Powell (1983: 148)
define an organizational field as follows:
. . . those organizations that, in the aggregate, constitute a recognized area of
institutional life: key suppliers, resource and product consumers, regulatory
agencies, and other organizations that produce similar services or products.
The virtue of this unit of analysis is that it directs our attention not simply to
competing firms . . . or to the networks of organizations that actually interact . . .
but to the totality of relevant actors.

From this perspective, the focus is not on a predetermined country level of

analysis but on the boundaries of the institutional context as defined by the
activity in which the MNC is involved.
Drawing together our arguments thus far allows us to develop an
alternative definition of institutional distance:
Institutional distance is a measure of the differences in the cognitive, regulative
and normative institutions that characterize the relevant organizational fields in
the home and host environments and the degree of institutional uncertainty in
the host country.

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Institutional entrepreneurship and IM

One of the important weaknesses of institutionalism in IM is that it conceptualizes the MNC as passively exposed to and constrained by either the
domestic system in which it is located or by global contingencies and as a
result many researchers fail to allow for any independent capacity for strategic
action that a company may possess (Lane, 2001: 71). As a result, to the
extent that IM has acknowledged the capacity of MNCs to enact institutional
change, it has focused on how the institutional context facilitates and/or
hinders MNCs in this process rather than MNCs capacity for action.
While MNCs are clearly constrained by institutional structures, the
scholarship on institutional entrepreneurship highlights the skills and capabilities that organizational actors can use to engender institutional change.
This more explicit focus on agency is clearly illustrated in Maguire et al.s
(2004: 657) definition of institutional entrepreneurship: the activities of
actors who have an interest in particular institutional arrangements and who
leverage resources to create new institutions or to transform existing ones.
The notion that MNCs can act as institutional entrepreneurs has
profound implications for research on institutional distance. Most notably,
rather than simply reacting to the institutional distance they encounter, some
MNCs have the capacity to overcome or reduce it. Revisiting Figure 1, we
are able to posit two distinct types of institutional entrepreneurship that
MNCs can engage in, each of which corresponds to a different combination
of institutional difference and institutional uncertainty.
First, where MNCs are confronted with high institutional difference
and low institutional uncertainty (top left quadrant), they need to transpose
institutions from their home country to their host country to make their
business model work. However, low levels of institutional uncertainty
imply a deeply embedded institutional context with very stable and ordered
patterns of behaviour. To engender change in stable institutional settings,
institutional entrepreneurs need to: (1) develop an understanding of the
prevailing institutional context; (2) undermine its utility by showing that the
existing institutions are ineffective in some way; and (3) develop a picture of
an alternative future that solves the identified problems (Greenwood et al.,
2002) so that consensus can be developed around a new set of institutional
arrangements. This could involve MNCs lobbying policy-makers in host
countries to change regulations, or creating industry associations or other
networks that shift the patterns of interaction that characterize the field.
Second, where MNCs are confronted with low institutional difference
but high institutional uncertainty (bottom right quadrant), they need to
alter aspects of the institutional context of the host country if their business
model is to be viable. High levels of uncertainty imply that institutional
configurations are liable to be characterized by rules and practices that are
not widely diffused. Institutional entrepreneurship in this context involves

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a different set of skills than those outlined above. Specifically, MNCs need
to be able build networks and alliances in the host country, to develop lines
of arguments that appeal to a diverse variety of stakeholders and to align
new norms and practices with the values of these stakeholders (Maguire
et al., 2004). This might, for example, involve MNCs offering products or
services that have not previously been available, and which has the effect of
structuring a previously unstructured field.
In the top right hand quadrant, where MNCs are confronted with high
levels of institutional uncertainty and high levels of institutional difference,
they clearly need to engage in both types of institutional entrepreneurship,
which represents a profound challenge to even the most well-resourced and
institutionally skilled MNCs. Success, at least in the short run, is unlikely
although the rewards for successful companies are often large.

Conclusions and implications for research

Our arguments have a number of important ramifications for research in IM.
First, while some progress has been made in terms of developing empirical
measures for institutional distance, much more needs to be done. Most
importantly, existing measures do not take account of institutional uncertainty nor do they reflect the need to focus on the differences between relevant
organizational fields. Developing more robust and fine-grained measures of
institutional distance will make the concept much more useful for research
and practice.
Second, existing discussions of institutional distance have been concerned
primarily with the organizational challenges it poses. We have added a
strategic dimension to these discussions by suggesting that different types
of institutional distance demand different strategies to overcome them. In
doing so, we contribute to emerging debates in international strategy (e.g.
Ghemawat, 2008) and non-market strategy (e.g. Henisz and Zelner, 2003) in
strategic organization. Future research could usefully explore the relationship
between international strategy and institutional distance in more detail. A
particularly interesting question concerns the resources and capabilities
required to address different types of institutional distance. Moreover, do the
strategies that we have identified represent the most salient ones, or are there
other strategies that MNCs might pursue?
Finally, the observation that MNCs do not just respond to their institutional context but may, in certain circumstances, act to manage them leads
to an important new direction in IM. Researchers could draw on the extensive
research on institutional entrepreneurship in new institutional theory to
develop a deeper understanding of the conditions under which MNCs will
engage in this kind of activity and the factors that will make their attempts at
institutional entrepreneurship more likely to succeed. Making this transition

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to a more agentic view of MNCs challenges a number of assumptions and

models in IM and has the potential to bring important aspects of MNC
activity more clearly into focus.
But the ramifications of our arguments are not limited to IM. The concept
of institutional distance highlights an opportunity not only for institutional
theory to further inform IM, but also for IM to inform institutional theory:
To date, institutional theory has provided an evolving framework of inquiry
rather than a set of tested propositions. However, its relevance for some key issues
in the international management field make it a paradigm whose development
is important to the field, and some of its critically important unexplored issues
make it a paradigm to which the study of the multinational can make a major
contribution. (Westney, 1993: 75)

The fact that MNCs prosper while straddling multiple organizational

fields in multiple countries means that they provide an interesting and
potentially illuminating context for the study of institutional dynamics
(e.g. Kostova et al., 2008; Phillips and Tracey, 2009). Moreover, the scale
and scope of many MNCs are such that they are continually engaged in an
interesting form of institutional entrepreneurship, which has seldom been
considered by institutional researchers and which could shed new light on
the concept.
Unfortunately, however, the focus of attention in institutional theory
remains firmly on firms that act within a single organizational field and within
one country, most notably the US. This represents a serious shortcoming
on the part of institutional theory. Indeed, an important question for institutional researchers is whether the theorys core arguments stand up in an
international context. Given that institutional research is often qualitative
and conducted longitudinally, it is perhaps understandable that researchers
should focus on the contexts with which they are most familiar. But in a
globalizing economy with national boundaries arguably less and less relevant,
a significant challenge facing institutional theory is to consider international
institutional dynamics. In this respect, IM may provide important insights
for institutional theory.

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Nelson Phillips is Professor of Strategy and Organizational Behaviour at Imperial College

London where he is also head of the Organization and Management Group. His research
interests include various aspects of organization theory, technology and entrepreneurship,
generally studied from an institutional perspective. He has published numerous
academic articles and book chapters including articles in the Academy of Management
Journal, Academy of Management Review, Management Science, Sloan Management Review,
Organization Science, Journal of Management Studies, Strategic Organization, Entrepreneurship
Theory and Practice and Organization Studies. He has also written two books: Discourse

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Analysis (SAGE, 2002), with Cynthia Hardy, and Power and Organizations (SAGE, 2006),
with Stewart Clegg and David Courpasson. He is currently editing a volume for the
Research in the Sociology of Organizations series on technology and organizations and
is also co-editor (with Marvin Washington) of the Journal of Management Inquiry. Address:
Imperial College Business School, Tanaka Building, South Kensington Campus, London
SW7 2AZ, UK. [email: n.phillips@imperial.ac.uk]
Paul Tracey is Lecturer in Human Resources and Organizations at the Judge Business
School, University of Cambridge. He was previously Assistant Professor of Entrepreneurship
at Warwick Business School. His research interests include entrepreneurship, regional
innovation and institutional change. He has published in a range of academic journals
including the Academy of Management Review, Organization Studies, Entrepreneurship
Theory and Practice and Strategic Organization. He has recently begun work on a project
on organizational corruption. Address: Judge Business School, University of Cambridge,
Trumpington Street, Cambridge CB2 1AG, UK. [email: p.tracey@jbs.cam.ac.uk]
Neri Karra currently manages the Designing Demand programme at Design London, a
international centre for design-led innovation created by Imperial College Business School
and Royal College of Art. Prior to joining Design London, Neri completed her PhD in
Management Studies at the Judge Business School, University of Cambridge and lectured
at the London College of Fashion. Her research interests include internationalization
of new ventures, family business and creative ventures. She has published a number
of papers in management journals including Entrepreneurship Theory and Practice
and Organizational Research Methods. Her research was nominated for the William
H. Newman Award for best paper from a doctoral thesis and was a finalist for Best
Paper in International Management at the Academy of Management. Her recent book,
Beyond Borders, focuses on international expansion in creative ventures (VDM Verlag
Dr Muller Aktiengesellschaft & Co. KG, 2008). Neri is also a successful entrepreneur
who founded and continues to manage her own fashion firm. Address: Design London,
Imperial College Business School, South Kensington Campus, London SW7 2AZ, UK.
[email: n.karra@imperial.ac.uk]

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