Scale or efficiency? Performance shortfall and engagement in production activities of foreign subsidiaries in China

Abstract

This study probes the effect of performance shortfall of a foreign subsidiary on its engagement in scale- and efficiency-related production activities by incorporating the behavioral theory of the firm and the institution-based view. In the manufacturing sectors, we examined foreign subsidiaries that failed to achieve aspiration levels of performance in 30 subnational regions of China in 1998–2007. We find that as a performance shortfall increases, a subsidiary would hire a smaller number of employees and raise less capital to facilitate the unity of decision-making for the problemistic search. Meanwhile, the subsidiary conducts more efficiency-related activities to explore efficient solutions for the problemistic search. In addition, the effects of performance shortfalls on the subsidiary's trade-off engagement in scale- and efficiency-related activities are strengthened as regional institutions become better-developed. Better-developed institutions of a region facilitate market mechanisms and thus reduce the costs of employees and capital holders to vote with their feet. Moreover, such institutions provide adequate protection for competitive resources generated by efficiency-related activities of the subsidiary. This study delineates a decision portfolio composed of different levels of engagement in both scale- and efficiency-related activities made by a foreign subsidiary according to the level of its performance shortfall and the level of regional institutional development.