The Effects of Opportunism and Bounded Rationality on MNC Subsidiary Ownership: A Behavioral TCE Perspective

Abstract

This study aims to demonstrate the value of expanding transaction cost economics (TCE) into a behavioral theory of organizational decision making by studying how multinational corporations (MNCs) make subsidiary ownership decisions. We propose that TCE can be rendered behavioral by doing two things with regard to its opportunism and bounded rationality (BR) assumptions. First, according to the value-attitude-behavior hierarchy, we distinguish between opportunism and BR as values as opposed to as attitudes, and suggest that opportunism and BR be studied at the attitude level. Second, we theoretically separate BR from opportunism, and expand BR to include psychological bounds. The expanded BR is then used to link TCE with prospect theory and organizational learning, thus making TCE behavioral. Empirically, we take an institutional approach to operationalizing opportunism and BR as attitudes. We then examine their separate and joint effects on subsidiary ownership, and how MNCs can learn to reduce BR under the constraint of opportunism and adapt subsidiary ownership levels toward more rational direction. A longitudinal dataset (1996–2005) of 10,687 Japanese subsidiaries founded in 42 host countries was used for empirical testing, and the results largely supported our hypotheses. We discuss the theoretical and practical implications of building a behavioral theory of subsidiary governance.