Corporate Governance and the Multinational Enterprise

Abstract

Corporate governance refers to the array of structures, mechanisms, and institutional constraints that influence the ways in which firms control and manage their operations. Most analyses of corporate strategy implicitly assume that firms are risk-neutral and their strategic decisions are guided by short-term profit maximization. But foreign direct investment (FDI) projects undertaken by multinational enterprises (MNEs) typically require substantial commitments of resources, involve high levels of uncertainty and risk, and may not yield positive returns for many years. MNEs’ willingness to engage in outward foreign direct investment (OFDI) projects is likely to depend inter alia on the identity, expertise, and relative influence of the MNE’s major shareholders and other relevant stakeholders and their objectives, attitudes to risk, and decision-making time horizons. Furthermore, the impact of corporate governance mechanisms and structures will depend upon the formal and informal institutional attributes in both host and home countries. Any consideration of MNEs’ FDI strategies must therefore consider not only the MNEs’ own resources and capabilities but also their ownership structures and the governance environment within which they operate. Future research should focus on the impacts of both formal and institutions on MNE corporate governance and FDI strategy, how internal “conflicting voices” regarding FDI strategy are resolved, and how the impact of corporate governance on FDI may depend upon various firm (e.g., size) and project (e.g., FDI motive) characteristics.