The determinants of the use of process control mechanisms in FDI decisions in headquarters–subsidiary relationships

Abstract

This study investigates the impact of foreign direct investment (FDI) motivations and technological resource commitment on headquarters’ employment of process control over subsidiaries, to better understand the process control mechanisms. Drawing on agency theory and the resource dependence perspective, a cross-sectional data model is developed among the 1541 Taiwanese manufacturing firms engaged in foreign investments, 1015 headquarters–subsidiary (HQ–Sub) relationships in China were selected from the database; in each of these relationships, the headquarters is located in Taiwan, while the subsidiary is located in China. Our findings reveal that the headquarters will use process control if the primary motivation for setting up a subsidiary in a host country is resource-seeking, but not use process control with market-seeking motivation. This control process relationship is enhanced/weakened/weakened by the headquarters’/subsidiaries’/partners’ technological resource commitment. Taiwanese multinational corporations (MNCs) from newly industrialized economies (NIEs) seeking to choose control mechanisms that fit their technological resources and FDI motivations in China are given guidelines. It adds to the use of control mechanisms with HQ-Sub literature. Both resource-seeking and market-seeking motivations shed light on technological resource commitment by various units of an MNC, to ward off information asymmetry.