Opening the black box of democracy in international business: polity, politics, and policy distances

Abstract

In the current context of democratic backsliding, different political systems, such as democracies and autocracies, as well as political differences between democracies, play an important role in shaping economic relationships. Yet, studies of political factors in international business mostly focus on destination country politics or political distance, conceptualized as cross-country differences in political institutions. We argue that these approaches do not capture the full range of political differences between countries. We disaggregate political distance into polity distance (the difference between political institutions), politics distance (ideological differences between governing parties), and policy distance (substantive differences in policies). In a novel cross-country panel dataset, we combine firm internationalization with country-level political characteristics. We find that polity, politics, and policy distances negatively impact firm internationalization, with polity distance having a stronger negative effect on the internationalization of firms from more democratic countries, and politics distance having a stronger negative effect on firms from countries with right-wing governments, highlighting that these distances have both absolute and directional effects.