Ownership mode, cultural distance, and the extent of parent firms’ strategic control over subsidiaries in the PRC

Jonas Puck,Benjamin Bader,Igor Filatotchev,Markus K Hödl,Hans-Georg Wolff

doi:10.1007/s10490-016-9471-2

Abstract

Previous studies often associated a specific type of ownership mode with the extent of control a parent firm may have over (strategic) decision-making in a foreign subsidiary, suggesting that parent firms should have higher control over wholly-owned subsidiaries (WoS) than international joint ventures (IJVs). Building on principal agent theory, we argue that in the Chinese context higher ownership levels do not necessarily have a positive effect on the extent of control over the foreign subsidiary. We further argue that cultural distance between the parent firm and the subsidiary moderates this relationship. We test our hypotheses using data from a sample of 156 foreign subsidiaries in the People’s Republic of China (PRC) and find strong support for our arguments. Our findings show that in WoS parent firms reduce their extent of control, while in IJVs parent firms increase their extent of control. Moreover, we find that extent of control over WoS (IJVs) declines (increases) when cultural distance increases. Our results have significant theoretical implications for international business (IB) research as they challenge existing views with regard to the relationship between ownership mode and control as well as the moderating effect of cultural distance.

Highlights

Previous studies often associated a specific type of ownership mode with the extent of control a parent firm may have over decision-making in a foreign subsidiary, suggesting that parent firms should have higher control over wholly-owned subsidiaries (WoS) than international joint ventures (IJVs)
Research on Bsubsidiary mandate^ clearly indicates that even within the same type of ownership modes, parent firms may have varying levels of control over foreign subsidiaries, depending, for example, on their contribution of firm-specific assets (Birkinshaw et al, 1998) or the type of mandate they develop within the global Multinational corporations (MNCs) network (Birkinshaw & Morrison, 1995)
By grounding our study within the principal agent theory2 (Jensen & Meckling, 1976), we argue that ownership mode and extent of control are not equivalent, as the ownership mode only determines the contractual relation between the parent firm and the foreign subsidiary, but not the actual extent of control parent firms exercise over the decision-making process in their subsidiaries

Summary

Introduction

Previous studies often associated a specific type of ownership mode with the extent of control a parent firm may have over (strategic) decision-making in a foreign subsidiary, suggesting that parent firms should have higher control over wholly-owned subsidiaries (WoS) than international joint ventures (IJVs). By grounding our study within the principal agent theory (Jensen & Meckling, 1976), we argue that ownership mode and extent of control are not equivalent, as the ownership mode only determines the contractual relation between the parent firm and the foreign subsidiary (i.e., the potential structure of a decisionmaking hierarchy), but not the actual extent of control parent firms exercise over the decision-making process in their subsidiaries This assumption is in line with existing research that argues that control Bis a much more subtle phenomenon (...) and it can be quite distinct from mere consideration of relative equity ownership^ (Geringer & Hebert, 1989: 240–241). In a similar vein, Filatotchev and Wright (2011: 478) contended that Bdominant ownership may not bring control in certain host country environments and minority equity holders may have effective control of certain activities within an IJV.^ Surprisingly, empirical evidence on this important relationship is still lacking

Objectives

Discussion

Conclusion