The Impact of Institutional Reforms on Characteristics and Survival of Foreign Subsidiaries in Emerging Economies*

Abstract

abstractThis study goes beyond the conventional notion of the institutional environment of emerging economies and investigates their dynamic context. It examines the complex influences of policy reforms on the characteristics and survival of foreign subsidiaries in emerging economies before and after the 1997 Asian Economic Crisis. This study proposes that FDI policy reforms during times of crisis may not only have a positive effect on institutional munificence for foreign firms, but such drastic reforms may also produce a negative effect (e.g. institutional volatility and complexity) on the environment. We consider how foreign firms effectively respond to the unfavourable forces of the post‐crisis environments while taking advantage of the munificence of the policy reforms. We find that foreign subsidiaries tend to take the form of wholly‐owned subsidiaries (versus joint ventures), majority joint‐ventures (versus minority joint‐ventures), or trading operations (versus manufacturing operations) in the post‐crisis institutional environment. Consistently, foreign subsidiaries with these characteristics are more likely to survive in the post‐crisis environment.