Addressing Growing Pains of an Emerging Economy: A Quantitative Study on the Effects of Institutional Development and Institutional Distance on Firm Performance in China

Tytti Mälkki

Student thesis: Master thesis


The aim of this thesis is to study the effect that institutional development and institutional distance have on firm performance in China. The former refers to formal rules and regulation, while the latter describes distance between firm’s home and host environment. Both have been found to have an effect on firm performance, but their effect together has not been investigated. Institutional factors have been found relevant for firm performance especially in emerging economies because they reduce uncertainty. Uncertainty from political decision-making affecting performance has also been referred to as political risk in financial literature.
The two-phased analysis in this work was based on regional marketization index variables for institutional development and secondary enterprise data for foreign, private and state-owned firms, as well as total numbers were used to measure performance and institutional distance. Data was collected on subnational level from year 2000 to 2011. Regressions performed in this study were run first for the focal relationships between indices for institutional development and firm performance based on two financial ratios for efficiency and profit, and their regional deviation. In the second phase of this analysis, subgroup regressions were run based on institutional distance. The results suggest that institutional development has a significant effect on financial efficiency, and that institutional distance affects the focal relationship. The outcomes on effects on profit and performance variance are mostly inconclusive.
The findings in this thesis indicate that institutional development can be seen as a way to increase financial efficiency in emerging economies. In addition, efficiency for private companies have higher correlations than for foreign companies, while the effect for state-owned companies is much more limited. This supports the general concepts behind the significance of institutional distance, although further research for the combined effect of firm specific advantages and institutional development on performance is suggested. This thesis helps to clarify the impact of institutional distance and development in emerging economies, and shows that improving institutions through policy-making could increase economic competitiveness.

EducationsMSc in International Business and Politics, (Graduate Programme) Final Thesis
Publication date2017
Number of pages86