Institutional Barriers and Exits of Small-sized Foreign Subsidiaries under Unfavorable Conditions

Abstract

This study examines how market conditions in host countries affect the entry and exit decisions of multinational corporations’ foreign subsidiaries. Taking the real options perspective, we expect that smaller investments are associated with more flexible entry and exit. We also predict that better established host countries’ institutional and financial development facilitate easier exits for foreign subsidiaries under unfavorable market conditions. We find from a Cox proportional hazard rate model on STATA 10 that when market conditions become more unfavorable that smaller investment smaller investments endogenously chosen during the initial stage of internationalization lead to earlier exits than larger investments. We also find that strong institutional and financial development positively moderates small-sized subsidiaries’ earlier exits under negatively-resolved uncertainty conditions.