Institutional Complementarity and Substitution in Indian Multinational Enterprises’ Cross-Border Investment Decisions

The assumption that better institutions are favoured in multinational enterprises’ (MNEs) location choices has been questioned in terms of whether emerging market MNEs might have different capabilities associated with the institutional conditions in their home country that they may exploit when internationalizing. They might seek to expand both to better institutional environments (institutional substitution) and to other emerging market environments (institutional complementarity). We examine if elements of institutional complementarity and substitution are evident in the internationalization decisions of Indian MNEs, and whether there are boundary conditions or limits attached to the benefits of these two effects. Our arguments are tested on a sample of Indian MNEs’ cross-border acquisitions between 2002 and 2021. The study differentiates between institutional distance effects in terms of both magnitude and direction, and institutional quality. We raise the notion of “institutional ranges or thresholds” (different points on the institutional profile distribution representing varying levels of institutional quality) and explicitly seek to identify such thresholds where the effects of institutional complementarity and substitution may set in and/or disappear, and why that may be the case.