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relationship suggest that while performance may initially decline during
internationalization, it eventually rises, although excessive expansion can lead to

negative outcomes if institutional differences become too great.
2.2. Institution distance
Institution refers to the rules of the game. North (1991:97) defines institutions as
constraints that structure political, economic and social interactions (North, 1991:97).
Searle (2005; 21) specifies an institution “is any collectively accepted system of rules
(procedure, practices) that enables us to create institutional facts”. Drawing upon the
concepts given by North (1991) and Searle (2005), Hodgson (2006: 2) define
institutions as “systems of established and prevalent social rules that structure social

interactions”. Based on the previous literature, this paper considers institutions as
systems of rules that contain both social institutions and legal institutions. A social
institution or in other words, a cultural institution is made of informal rules such as
languages, taboos, customs, traditions, and codes of conduct while a legal institution
includes constitutions, laws and regulations.
2.2.1. Social institution distance (Cultural distance)

The role of national cultural distance in firm internationalization is a key element
of the Uppsala model (Johanson & Vahlne, 1977) and can be traced back to Beckerman
(1956). Cultural distance—defined as the differences between home and host country
cultures—plays a significant role in internationalization strategies.
Hofstede's cultural dimensions model is the most widely used theory in this
context. In 1980, Hofstede identified four dimensions: power distance, uncertainty
avoidance, individualism-collectivism, and masculinity-femininity, later adding a fifth

dimension—long versus short-term orientation (Hofstede, 2006). These dimensions
have since been extensively used to assess culture’s impact on cross-border business
(Beugré & Acar, 2008; King, 2007).
Recent literature generally supports the view that cultural distance negatively
impacts performance. Unlike other distances, cultural differences are often tacit and
harder to navigate, leading to misunderstandings in behavior and communication.

Differences in religion, values, and norms can create barriers that affect decision-
making and interpersonal interactions (Hakanson & Ambos, 2010). High cultural
distance complicates MNEs' ability to interpret market signals (Sousa & Bradley,
2006), contributing to failures in global strategies and hindering firms' learning
capabilities (Hutzschenreuter & Voll, 2008).
From the extant literature about cultural distance and firm performance, following
the dominant point of view, we propose that:
H1: Home-host country cultural distance has significant negative impacts on
MNE subsidiary performance within manufacturing industries
2.2.2. Legal institution
A considerable body of research has focused on the relationship between
institutions and MNEs’ performance.

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