EXPRESS: The Distinctiveness Effect: How Cross-Country Dissimilarities Influence Governance Decisions

Transaction cost theory (TCT) is one of the most commonly used theories to explain how firms govern their economic activities. In the context of cross-border collaborations, TCT proposes that dissimilarities between the partners’ home countries, which constitute a key source of behavioral uncertainty, affect how collaborations are governed (i.e., whether firms opt for equity joint ventures or non-equity alliances). Although many firms are likely to face more than one dimension of dissimilarity – for example in terms language and religion, as well as culture – studies in TCT typically focus on how each source of dissimilarity impacts governance choices independently, in isolation. We integrate insights from research on decision-making and social psychology into the logic of TCT to theorize about how multiple dimensions of dissimilarity interactively impact governance choices in collaborative agreements, such that the influence of a given level of dissimilarity is not independent of the level of dissimilarity in other dimensions. Specifically, we propose that the impact of dissimilarity on a given dimension on these governance choices will be lower, i.e. negatively moderated, when dissimilarities on other dimensions are higher. For example, a given level of cultural distance will have a greater impact on governance choice when linguistic distance is low (because cultural distance becomes more distinctive) as compared to a case when linguistic distance is not low. Our analysis of 21,951 cross-border non-equity alliances and equity joint ventures yields support for our predictions.