Subnational FDI Legitimacy and the Survival of Foreign Subsidiaries

Abstract

Using an organizational ecology perspective, we examine how the evolving FDI legitimacy in China at a subnational level influences the survival of Japanese subsidiaries there. Based on a longitudinal dataset (1998–2009) aggregated from Toyo Keizai, China Statistical Yearbook, and other sources, we find a U-shaped relationship between FDI legitimacy and the likelihood of subsidiary exit, with improving FDI legitimacy over time. The U-shaped relationship is moderated by the number of Japanese subsidiaries in the province where the subsidiaries reside such that the curve is flatter for subsidiaries located in provinces where there are more Japanese subsidiaries. We also find that with improving FDI legitimacy, the use of higher levels of expatriates and ownership will tend to jeopardize subsidiary survival for larger subsidiaries. The theoretical and practical implications of these findings are discussed.