Agglomeration as monitoring mechanism

Abstract

This study examines whether geographic agglomeration influences the entry mode of multinational corporation (MNC). Using data from 190 MNCs and their 1,854 foreign subsidiaries that entered China between 1983 and 2008, we found that MNCs are more likely to use low-control modes when their entries are agglomerated with subsidiaries of other MNCs with different business functions from the same home country. Such external subsidiaries substitute direct control more effectively than sister subsidiaries, which is further amplified when MNCs have experience in the host city. The substitution effect for agglomerating with sister subsidiaries exists only for those with the same function, and only when the host city has high-levels of government effectiveness. Experience in the host city, however, leads the focal subsidiary to increase ownership under agglomeration with the subsidiaries of other MNCs from the same home country with the same business functions. Overall, external subsidiaries with different function...