Exports and Financial Performance of Foreign Subsidiaries of Multinational Enterprises

Abstract

We examine the relationships between the host country’s economic freedom and the regional co-location of the subsidiary in the same home region as the parent firm on subsidiary exports, and the complex two-way relationships between subsidiary exports and financial performance. We develop our hypotheses drawing upon the insights from the research on foreign subsidiaries of multinational enterprises (MNEs). We use an original dataset of publicly-listed, majority-owned, and non-financial MNE foreign subsidiaries in five South East Asian countries. To address potential endogeneity concerns, we run two-stage least square regressions with an instrumental variable approach. First, we find support for our prediction that higher economic freedom of the host country is positively associated with higher exports of the subsidiary. Second, we find that the regional co-location of the subsidiary and the parent in the same home region is statistically significant and positively associated with subsidiary exports, suggesting a regionalization strategy of the subsidiary. Third, subsidiary exports have an insignificant relationship with overall financial performance and there is no reverse effect of performance on exports. We extend the literature by showing that country-level analysis needs to be augmented by the region-level analysis in determining export behaviors of MNE foreign subsidiaries.