Business group affiliation and foreign subsidiary performance

Abstract

AbstractResearch SummaryBusiness group (BG) affiliation affects the strategic behavior and performance of firms. Until now it has been theoretically unclear and insufficiently empirically tested whether affiliation advantages extend to the foreign subsidiaries of group members. We attempt to determine if they do, and if so, to identify the boundary conditions that matter. We analyze a large panel of 451 foreign subsidiaries of 136 Indian multinational firms over the 2003–2012 period and find that BG affiliation does enhance foreign subsidiary performance when host‐market institutions are weak and when the parent is in manufacturing.Managerial SummaryOur research speaks directly to managers of multinational firms who seek to leverage the benefits of BG affiliation across national borders. We show that BG affiliation is only beneficial when the foreign subsidiary is located in a country characterized by weak institutions and when the parent is in manufacturing. If, on the other hand, the foreign subsidiary is in a country with well‐functioning institutions and the parent in services, managers will not be able to count on BG advantages, rather they will have to develop competitive capabilities locally, that is, the foreign subsidiary will have to function more like a standalone firm.