Is the glass half full or half empty? Underestimating versus overestimating institutional distance and the importance of managerial cognition

Abstract

This study draws on a microfoundational view of international business to examine how managerial misperceptions of institutional distance, specifically, the underestimation and overestimation of formal and informal institutional differences between home and host markets, shape expansion strategies, in particular, location choice. Further, using the cognitive appraisal theory as a lens, it examines the moderating role of managerial cognitive styles, focusing on how traits, e.g., sensing versus intuiting and judging versus perceiving, influence these managerial misperceptions and their impact on foreign location choice. Using data from a vignette experiment with 208 international managers, the findings reveal that misperceptions of institutional distance can significantly skew managers’ perceptions of a foreign location, with cognitive traits playing a crucial role in mitigating these biases. By exploring the role managerial cognition plays in international strategic decision-making, this research contributes to understanding the microfoundational underpinnings of foreign location choice and provides practical implications for achieving managerial decision objectivity in complex institutional environments.