Drawing on the neo-institutional approach in organizational theory and global strategy, we advance a theory on the impact that differences in cultural egalitarianism have on multinational firms’ decision of where to engage in foreign direct investment (FDI) across the globe. Egalitarianism expresses a society’s cultural orientation with respect to intolerance for abuses of market and political power; it shapes the ways in which firms holding power interact with different stakeholders. After presenting a series of case illustrations, we find a strong negative impact of egalitarianism distance on FDI flows in a broad sample of nations and for different entry modes. Our results are robust to a broad set of competing accounts, including effects from other cultural dimensions, major features of the legal and regulatory regimes, other features of the institutional system, and economic development. These results hold while controlling for origin and host country factors through a fixed-effects specification as well as by using instruments for egalitarianism. We also find that other cultural influences are important as well. Differences in cultural harmony are actually positively associated with increased FDI flows, likely because multinational firms seek countries with lower societal support for entrepreneurship. FDI further tends to flow from high embeddedness to low embeddedness countries, and we link this in part to international regulatory arbitrage on environmental protection regimes.
It is well established that the effectiveness of pay-for-performance (PfP) schemes depends on employee- and organization-specific factors. However, less is known about the moderating role of external forces such as market competition. Our theory posits that competition generates two counteracting effects—the residual market and competitor response effects—that vary with competition and jointly generate a curvilinear relationship between PfP effectiveness and competition. Weak competition discourages effort response to PfP because there is little residual market to gain from rivals, whereas strong competition weakens incentives because an offsetting response from competitors becomes more likely. PfP hence has the strongest effect under moderate competition. Field data from a bakery chain and its competitive environment confirm our theory and let us refute several alternative interpretations.