Governance, Once Removed: Shareholder Rights Effectiveness vs. Expatriate Deployment

Abstract

We investigate the impact of host-country shareholder rights protection on location and governance modes of Japanese foreign direct investment (JFDI). Agency theory predicts that strong shareholder rights protection in host countries should not increase location attractiveness nor impact entry and governance mode decisions, as foreign shareholders are outside the jurisdiction of host country laws. However, informal institutional mechanisms, including managerial bonding and isomorphic pressures, as predicted by institutional theory, may create indirect control over host country managers which reduces agency costs. Hence, we predict that higher shareholder rights protections will enhance a potential host country’s JFDI attractiveness, and that subsidiaries established in host countries with higher shareholder rights protection will employ fewer Japanese expatriates. We find support for our predictions based on a sample of JFDI established between 1986 and 2012.