An institutional response model to economic liberalization: Japanese MNEs’ ownership choices in China

Abstract

This study investigates how Japanese MNEs are adapting their ownership choices to accommodate China’s economic liberalization. Drawing upon the institution-based view of the firm, we propose an institutional response model that is simultaneously based on the progress of economic liberalization and the accumulation of subsidiary experience. This model suggests that Japanese MNEs increasingly adopt higher ownership levels in their subsidiaries because of the combined effects of deepening deregulation on foreign investments, declining pure uncertainty, and increasing contingent uncertainty during economic liberalization. It also suggests that the progress of economic liberalization continuously changes the combination of the two types of institutional uncertainty (pure and contingent), contextualizing the influence of subsidiary experience on Japanese MNEs’ ownership choices. Using data for Japanese investments in China between 1991 and 2013, we construct a latent growth-curve model to provide empirical evidence for the proposed institutional response model.