What’s in a Name? CEO Foreignness and Government Inspections of MNCs

Abstract

Government inspections, such as workplace compliance with local tax or safety regulations, are ubiquitous and represent a significant proportion of time that managers of multinational firms spend on interacting with government stakeholders in host markets. Disadvantaged by the information asymmetry about firms’ non-compliance with regulations, how do boundedly rational inspectors select inspection targets? Drawing on the theory of social judgments, we propose that inspectors treat CEO foreignness, that is, whether a CEO of a firm is local or foreign, as a marker of potential organizational non-compliance with local institutional demands, therefore, prompting them to select MNC subsidiaries with foreign CEOs for inspections more often. We further explore four boundary conditions, which we argue weaken the association between CEO foreignness and the perception of potential non-compliance. We test our hypotheses on a sample of 2,259 foreign subsidiaries that operated in Russia between 2015 and 2018 and find evidence supporting most of the hypotheses. Our primary contribution is to the liability of foreignness research, specifically, the mechanisms underpinning the discrimination hazard, as well as MNCs’ subnational location in host markets and nonmarket strategy.