| Since the adoption of reform and opening-up policies, the Chinese economy has been growing dramatically. The Chinese market has expanded quickly and become increasingly important for Chinese security firms during this process. How to develop and utilize the regional market in China is a great challenge for Chinese security firms. Security firms will become more competitive by developing and utilizing the Chinese regional markets through regional diversification strategy. However, Chinese security firms are not good at utilizing the subnational markets currently. In fact, most Chinese security firms are regional firms which operate in minority regions of China. Therefore, it’s of high importance to investigate the antecedents of firm subnational. diversification performance, which will provide valuable suggestions for firm regional diversification decisions within China. However, so few studies concern this critical topic, making it hard to offer practical guidance for security firms during their regional diversification process.By drawing on the institutional theory, this article instigates the antecedents of Chinese security firms’ subnational diversification performance. Due to different areas have substantial differences in informal rules, enforcement characteristics, and formal rules, the institutional environment differs dramatically from one area to another in China, suggesting that huge institutional distances exist among different Chinese areas. Institutional distance, which largely increases the costs and risks of firm regional diversification, is one of the most critical barriers of firm regional diversification in China. Therefore, this article focuses on the effects of institutional distance on firm regional diversification performance in China. This article, by analyzing the effects of institutional distance on firm legitimacy, operating costs, and institutional arbitrage, builds up a theoretical model which is "institutional distance-regional diversification strategy-regional diversification performance". This model discusses the influences of institutional distance on firm regional diversification performance theoretically. Based on this model, we propose several hypotheses.This article, based on archival data of Chinese security firms from the year2001to2009, tests hypotheses empirically. We find that:(1) Institutional distance between a firm’s home province and the host province is negatively associated with firm regional diversification performance in the host province.(2) Institutional distance has negative effects on firm regional diversification strategy. The larger of institutional distance between the home and the host province is, the less branches there are in the host province.(3) Regional diversification strategy is positively related to firm regional diversification performance.(4) Regional diversification strategy mediates the relationship between institutional distance and firm regional diversification performance.(5) Relative institutional development moderates the relationship between institutional distance and firm regional diversification strategy and performance. The negative effects of institutional distance on firm strategy and performance of regional diversification is stronger for firms from high institutional development areas than those from low institutional development areas.(6) Firm regional diversification experience moderates the relationship between institutional distance and firm regional diversification strategy and performance. The richer experiences of regional diversification a firm has, the weaker negative effects institutional distance has on firm regional diversification strategy and performance.This article makes both theoretical and empirical contributions to the regional diversification and the institutional distance literatures.(1) Building up on the institutional theory, this article forms a theoretical model of the relationship between institutional distance and firm regional diversification performance. This provides a new theoretical view in explaining firms’ subnational diversification strategies, extends the research areas of institutional theory to a large extent, and advances the applying and developing of institutional theory in emerging economies.(2) By exploring the mediating effect of regional diversification strategy theoretically and empirically, this article upgrades our understanding of the effect of institutional distance on firm regional diversification performance.(3) This article investigates the moderating effects of relative institutional development and regional diversification experience, thus offering important insights into the effect of institutional distance on firm regional diversification performance under different conditions.(4) This article develops a scale of the regional institutional environment in China, and measures the institutional environment of provinces and the institutional distances among provinces, building a solid foundation for further empirical studies.(5) With empirical evidences of service firms in emerging economies, this article largely complements current studies which focus on manufacturing firms in western countries,and greatly advances the applications and developments of institutional theory in emerging economies and service industries.This article provides practical implications for security firms in China.(1) Firms should focus more on regional markets in China, and make good use of and grows up rapidly based on the booming Chinese regional markets.(2) To reduce the negative effects of institutional distance on firm regional diversification, firms should enter into institutional adjacent areas during the process of regional diversification.(3) Firms should pay more attention to the tacit dimensions of institutional distance such as culture distance in evaluating institutional distance between areas.(4) Firms from high institutional development areas should be more careful with the potential negative effects of institutional distance and adopt more conservative regional diversification strategies.(5) It’s of great importance for firms to accumulate regional diversification experiences which can weaken the negative effects of institutional distance. Finally, this article also has several important guidelines for policy makers in China.(1) In order to attract security firms from other areas, governments should focus more on reducing the institutional distance instead of improving institutional environment.(2) Improve institutional transparency continuously, which helps to reduce the negative effects of institutional distance on the operations of firms from other areas.
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