Host Market Corruption, Subsidiary Strategies and Market Exit

Abstract

We study the relationship between host market corruption pervasiveness, the subsidiary localization strategies implemented by MNEs and the likelihood of host market exit. We assume that the pervasiveness of corruption in the host market threatens to undermine the legitimacy of foreign-investing firms in the host market environment. In this context, the strategic insights proffered by resource dependence theory (RDT) and institutional theory (IT) are characterized by distinct spatial orientations. RDT predicts that subsidiaries will implement proximal (or, host market-oriented) localization strategies in which host country partners and employees are hypothesized to be best-suited to efforts to enhance the subsidiary’s legitimacy and reduce the likelihood of host market exit. Conversely, IT suggests that distal (or, home market-oriented) localization strategies, in which subsidiaries prefer to engage home country partners and employees in the subsidiary investment, are better-suited to reducing the likelihood of exit from increasingly corrupt host market environments. Leveraging this theoretical tension, we investigate the relative efficacy of these strategies by developing competing hypotheses with respect to the moderating impact of proximal and distal localization strategies upon the likelihood of market exit in increasingly corrupt host market environments. Testing the hypotheses with a sample of 1,239 subsidiary investments in 31 countries during 1998-2005, we find that a proximally-oriented partnering strategy heightens the likelihood of market exit under conditions of more pervasive host market public corruption, but not more pervasive private corruption. Conversely, a distally-oriented expatriate staffing strategy increases the likelihood of market exit under conditions of both more pervasive public corruption and private corruption.