Abstract:   This paper explores the impact of different dimensions of institutional distance on the innovation performance of Chinese enterprise after cross-border M&A. While more and more Chinese firms participate in cross-border M&A to seek knowledge abroad, many of them failed due to the difficulties brought by institutional distance between the host and home countries. However, the academic literature provides limited understanding of the impact of institutional distance on innovation performance after cross-border M&A. Therefore, it is imperative for us to examine this issue in the context of Chinese firms.Institutional distance is a multi-dimensional concept. In this study, we distinguish between formal and informal institutional distance and examine their different impacts on the innovation performance of cross-border M&A. In particular, we argue that the information asymmetry and political discrimination brought by formal institutional distance are hard for firms to overcome, thus leading to a negative impact of formal institutional distance on the innovation performance of cross-border M&A. On the contrary, informal institutional distance could increase knowledge diversity that firms face, thus increasing the innovation performance of cross-border M&A. Moreover, prior M&A experience of firms could help them learn how to overcome the difficulties brought by formal institutional distance, thus weakening the negative impact of formal institutional distance on innovation performance of cross-border M&A.We test these ideas using a sample of Chinese listed manufacturing firms that have implemented cross-border M&A from 2014 to 2017. We adopt zero-inflated negative binomial regression model to examine the effect of formal and informal institutional distance on the innovation performance of cross-border M&As, as well as the moderating role of acquirers′ M&A experience. Empirical results indicate that formal institutional distance has a significant negative impact on the innovation performance of Chinese enterprises after cross-border M&A, while the informal institutional distance has a significant positive impact on the innovation performance of Chinese enterprises after cross-border M&A. In addition, we find that acquirers′ prior experience in cross-border M&A weakens the negative effect of formal institutional distance on innovation performance. Although we predict that prior M&A experience could also strength the positive impact of informal institutional distance on innovation performance, we did not find support for this prediction. It could be driven by the fact that informal institutions are tacit and cross-border M&A experience in one country could not be applied in another country without modification, thus mitigating the positive moderating effect of M&A experience on the relationship between informal institutional distance and innovation performance of cross-border M&As.The findings of this study enrich our understanding of the impact of institutional distance on innovation performance of cross-border M&As. Institutional distance is a double-edged sword when it comes to the innovation performance of cross-border M&As. On the one hand, formal institutional distance creates barriers for innovation after cross-border M&As. On the other hand, informal institutional distance creates opportunities for firms to benefit from knowledge diversity. For managers of firms conducting cross-border M&As, it is necessary to understand such difficulties and opportunities, and evaluate whether their firms have the capability to overcome such difficulties and capture the opportunities before they make the strategic decision of conducting cross-border M&As. Our study suggests that one proper way to develop such capability is to accumulate relevant cross-border M&A experience. Our study thus provides both theoretical support and practical guidance to firms that intend to increase their innovation capability by engaging in cross-border M&As.

Key words:  institutional distance, cross-border M&A, innovation performance, cross-border M&A experience