The impact of the institutional environment of the host country on the perception of compliance risk of the international engineering contractor: the moderating effect of absorptive capacity

Purpose While there is a general belief that a defective institutional environment will lead to higher compliance risk, the current state of knowledge about how the institutional environment affects enterprises' compliance is equivocal. This study aims to explore how does the host country's institutional environment affect the compliance risk perception of international engineering contractors and how to mitigate this impact. Design/methodology/approach This study empirically tests the impact of the institutional environment from the two dimensions of the institutional environment: legal completeness reflects whether the formal regulations are clear, detailed and comprehensive and legal effectiveness reflects whether rules and policies can be implemented effectively when the proper legal codes are provided. Based on 213 questionnaire data, this study uses partial least squares structural equation model (PLS-SEM) and Smart PLS software to test the hypothesis. Findings This study finds a negative relationship between the host country's legal completeness (LC) or legal effectiveness (LE) and a contractor's compliance risk perception. Further, the results show potential absorptive capacity (PAC) and realized absorptive capacity (RAC) of a contractor are critical for mitigating the impact of low LC in the host country, but not when LE is low. Practical implications The findings will be useful for international engineering contractors to respond to the compliance risk of the host country, both in choices of overseas investment locations and compliance capacity building. Originality/value This study reveals the impact of the host country's institutional environment on the compliance risk perception of international contractors, and provides theoretical guidance for how to alleviate the compliance barriers brought by the host country's institutional environment to international engineering contractors.