Foreign Affiliate Performance Research Articles

Assets of foreignness in a regulated industry

Purpose Foreign subsidiaries incur substantial institutional conformity costs because they have to respond to host-country institutional pressures (Slangen & Hennart, 2008). The purpose of this paper is to study this type of cost from institutional and regulatory perspectives. The authors argue that these costs decrease when the host country adopts concepts of international regulations that multinationals may be familiar with due to their own home country regulation experience. This prior regulatory experience gives foreign subsidiaries an advantage of foreignness (AoF), which can offset their liability of foreignness (LoF). Design/methodology/approach This study compared the returns on assets of 35 domestic firms with those of foreign subsidiaries in the Brazilian energy industry between 2002 and 2021, using regression dynamic panel data. Findings The existence of a relationship between the international regulatory norm and the Brazilian regulator has transformed the LoF into an advantage of foreignness to compete with local energy firms. The results also suggest that the better the regulatory quality of the subsidiary’s country of origin, the better its performance in Brazil, as it can reduce compliance costs. Finally, the greater the psychic distance between Brazil and the foreign subsidiary’s home country, the worse its performance. Research limitations/implications The research suggests that one of the keys to competitiveness in host countries is local regulatory ties. Prior international regulatory experience gives foreign subsidiaries an asset of foreignness (AoF). This result complements the current institutional and regulatory foreignness studies on emerging economies (Cuervo-Cazurra & Genc, 2008; Mallon et al., 2022) and the institutional asymmetry between home and host country (Mallon & Fainshmidt, 2017). Practical implications This research suggests that one of the keys to competitiveness in host countries is local regulatory ties. Prior international regulatory experience gives foreign subsidiaries an asset of foreignness (AoF). This result complements the current institutional and regulatory foreignness studies on emerging economies (Cuervo-Cazurra & Genc, 2008; Mallon et al., 2022) and the institutional asymmetry between home and host country (Mallon & Fainshmidt, 2017). The practical implication is that the relationship between conformity costs, capital budget calculation and strategic planning for internationalization will be related to the governance quality of the home country of multinationals. The social implication is that a country interested in attracting more direct foreign investment to areas that need foreign technology transfer and resources may consider adopting international regulatory standards. Social implications The social implication is that a country interested in attracting more direct foreign investment to areas that need foreign technology transfer and resources may consider adopting international regulatory standards. Originality/value This research discuss firm and local regulator tie is one of core competitiveness in host countries (Yang and Meyer, 2020). This study also complements the current institutional and regulatory foreignness studies in emerging economy (Cuervo-Cazurra & Genc, 2008; Mallon et al., 2022). Second, prior regulatory experience of multinational enterprise in similar environment can affect its foreign affiliate performance (Perkins, 2014). Third, this study confirms current literature that argues that knowledge and ability to operate in an institutionalized country can be transferred from parent to affiliate. In the end, this study investigates whether AoF persists when host governments improve the governance of their industries.

How much does host country matter, really?

How much does the host country matter in explaining foreign affiliate performance? Using a global sample of 34,708 foreign affiliates operating in 91 host countries, we revisit the relative importance of the host country effect as a performance determinant. Our variance decomposition results suggest that the host country effect is less salient than previously identified, often explaining a small portion of affiliate performance differences. We offer implications for future international strategy research on foreign affiliate performance, advancing an understanding of the relative importance of external and internal determinants. We direct scholarly attention to other effect classes, namely the affiliate effect.

Lateral knowledge transfer and foreign affiliate performance: The importance of affiliate strategic roles

This paper explores lateral knowledge transfer within the multinational enterprise, i.e. knowledge flow between an affiliate and its sibling affiliates, and we consider how the relationship between the affiliate and its siblings influences lateral knowledge transfer. Drawing on more than 6000 foreign affiliates in over 60 host countries, we evidence a positive and significant impact on affiliate performance from its siblings' intangible assets. We group sibling affiliates' roles into horizontal, upstream, downstream and unrelated categories accordingly to a sibling's activities in relation to its respective affiliate's value chain. Specifically, we find that the effect of lateral knowledge transfer on affiliate performance is bigger (1) when siblings are in related sectors, rather than unrelated sectors; (2) when the affiliate and siblings are in horizontal relationship, rather than vertical relationship; and (3) when siblings are upstream, rather than downstream, in the affiliate's value chain.

The dynamic process of pro-market reforms and foreign affiliate performance: When to seek local, subnational, or global help?

Little is known about how the dynamic process of pro-market reforms influences the performance of foreign affiliates in emerging economies and how multinational enterprises (MNEs) can deal with such a dynamic process. This study disentangles the dynamic process of pro-market reforms into three dimensions – speed, (un)predictability, and (un)synchronization – and argues that the performance of foreign affiliates suffers when pro-market reforms are slow, unpredictable, and unsynchronized. To mitigate the detrimental impacts of the three distinctive dimensions of pro-market reforms, MNEs can deploy strategies that allow their foreign affiliates to seek local help from other strongly embedded “central” organizations, subnational help from sister affiliates in other subnational regions of the same host country, and global help from parent firms. To test these arguments, this study performs a 10-year longitudinal analysis of 79,763 foreign affiliates operating in China. The results provide evidence that seeking local help is effective in mitigating the negative effect of slow pro-market reforms on foreign affiliate performance, but has no effect on the unpredictability of pro-market reforms. In addition, subnational help is as effective as global help in mitigating the negative effect of unsynchronized pro-market reforms on foreign affiliate performance.

Host Country’s Non-economic Factors, Local Managers, and Foreign Affiliate Performance

Purpose - This paper examines the effects of host country’s non-economic factors on foreign affiliate’s financial and operational performance. Design/Methodology - Using Korean-owned foreign affiliate-level data, we employ various measures that represent host country’s non-economic factors and examine their effects on foreign affiliate’s performance. We further investigate the effects of local top managers and local middle managers on the impact of country’s non-economic factors on foreign affiliate’s performance. Findings - We find that local top managers are effective in increasing foreign affiliate’s financial performance by dealing with institutional and cultural factors, particularly in high-income countries, while local middle managers are effective in increasing affiliate’s operational performance by responding to the changes in doing business factors, particularly in low-income countries. Originality/value - Considering that most of previous FDI studies focus on examining host country’s economic factors on firm’s FDI decision, our findings suggest that country’s non-economic factors are strongly associated with actual business performance of foreign affiliates.

Ownership Strategy and Foreign Affiliate Performance in Multinational Family Business Groups: A Double-edged Sword

Abstract We argue that ownership strategies can be a double edged sword for multinational family business groups from emerging economies and the performance of their affiliates located abroad. We test an integrated framework based on internalization and agency theory on a longitudinal dataset of multinational family business groups from Taiwan. We find evidence for the contingent impact of cultural differences and family management on the association between ownership strategy and affiliate performance. While direct ownership is seen as offering more control over the affiliate, we show that this comes at a performance cost for affiliates in culturally different host countries and affiliates under family management. Indirect ownership seems to be one way to positively influence affiliate performance in culturally distant countries, but seems not to be contingent on family management utilization.

Dissecting the sources of competitive advantage of infant MNEs: performance antecedents of foreign affiliates of Polish firms

This paper draws from the resource-based view, organisational learning perspective and institution-based view of international business to explore the effects of firm capabilities and international experience on the performance of foreign affiliates of infant MNEs. In doing so, it aims to contribute to the debate on the competitive advantage of firms from less advanced economies which have only recently joined international business transactions. Moreover, the analysis includes the moderating effect of institutional differences, i.e. both more and less institutionally advanced host countries. The analysis reveals that managerial capabilities are more relevant to success in more advanced economies than in less advanced ones where non-market strategies are frequently the source of advantage of infant MNEs. Moreover, in more advanced markets overall FDI experience is essential to successfully starting up operations, to a larger extent than in less developed countries. An opposite effect can be observed for prior experience with similar countries.

Dynamic marketing capabilities, foreign ownership modes, sub-national locations and the performance of foreign affiliates in developing economies

PurposeThe purpose of this paper is to examine the role of dynamic marketing capabilities (DMC), foreign ownership modes and sub-national locations on the performance of foreign-owned affiliates (FOAs) in developing economies.Design/methodology/approachBased on a sample of 254 FOAs in the Indian manufacturing sector (covering the period of 2000-2008 leading to 623 firm-year observations), the empirical paper adopts the panel data regression approach.FindingsThe study confirms the significant importance of DMC to assist FOAs to gain better sales performance in an emerging market such as India. The findings indicate that wholly owned foreign affiliates (WOFAs) have better sales performance than international joint ventures (IJVs), and majority-owned international joint ventures (MAIJVs) perform better than minority-owned international joint ventures in the Indian manufacturing sector. The results confirm that effective deployment of DMC leads to better sales performance in WOFAs and to some extent in MAIJVs. Perhaps the most interesting finding is that developing DMC in non-metropolitan areas is associated with higher sales growth than in metropolitan locations.Originality/valueThe study contributes to the literature by examining the impact of DMC on performance of FOA by considering the organised manufacturing sector in a large and fast growing developing economy. In addition, the results for the moderating effects provide novel evidence of the conditions under which DMC of FOA interact with different ownership modes and influence firm performance.

A double-edged sword? The moderating effects of control on firm capabilities and institutional distance in explaining foreign affiliate performance

By drawing from the internalisation and institutional theories, as well as the organisational capability perspective, the paper analyses the moderating effects of parent control over foreign affiliates in relation to firm capabilities and institutional distance and their performance effects. These relationships are explored in the context of new MNEs from Poland as a mid-range emerging economy, for which ownership choices constitute critical decisions given their early stage of internationalisation. Our findings show that while firm capabilities drive foreign affiliate performance, the increase of parent control limits this beneficial effect, suggesting the potential occurrence of organisational inertia and reduction of learning in foreign markets. On the contrary, we also find partial evidence that the increase of parent control reduces the negative effect of institutional distance computed based on the Mahalanobis formula. Accordingly, the study suggests a certain ambiguity of parent control in affecting affiliate performance.

Firm-specific intangible assets and subsidiary profitability: The moderating role of distance, ownership strategy and subsidiary experience

How does distance attenuate the value of MNC parent intangible assets on affiliate profitability? Beyond the basic assumption of internalization theory about the positive relationship between parent intangibles and foreign affiliate performance, we test how this relationship, is contingent on ownership strategy, subsidiary experience, and is moderated by the distance between home and host economies, in terms of differences in technological capacity, intellectual property regimes, economic development, language and geography. Based on newly-available accounting data on intangible assets, we test hypotheses on a sample of over 2000 multinationals and 5000 of their overseas affiliates in 45 home and host economies.

Institutional difference, organizational experience, and foreign affiliate performance: Evidence from Polish firms

We draw from the institutional economics and organizational learning theories to clarify two international business debates. The first debate involves how institutional distance affects foreign affiliate performance: some propose a negative and others a positive direct effect. We clarify this debate by differentiating between negative and positive institutional difference. The second debate involves how experience modifies this relationship: some propose a negative and others a positive moderating effect. We clarify this debate by differentiating between similar and dissimilar experience, creating four moderating effects: Advantage of Challenge Anticipation, Advantage of Opportunity Anticipation, Disadvantage of Polymath Downgrading, and Disadvantage of Specialist Upgrading.

Arbitrariness of corruption and foreign affiliate performance: A resource dependence perspective

Adopting a resource dependence viewpoint, this study investigates how the arbitrariness of corruption in a host country affects subsidiary performance. Analysis of bank foreign affiliates in 37 host countries shows that the negative effect of arbitrariness on affiliate performance is positively moderated by the strength of the sub-unit's corporate link, and the average number of expatriate managers appointed at the sub-unit. This study extends the literature on corruption by exploring a subtle but damaging dimension for foreign entrants and provides cues to managers for the proactive measures to take when they are likely to experience the arbitrariness of corruption.

"Institutional Substitution, Affiliate Contingency, and Foreign Affiliate Performance"

Basing the institution-based view, this article investigates the separate and joint effects of economic, political, and social institutions between or within subnational regions on foreign affiliate performance, and the relative magnitude of these three institutional constituents given affiliate contingency. A longitudinal analysis containing 483,335 foreign affiliate-year observations that include 127,211 foreign affiliates in 31 Chinese subnational regions during 1998-2008 shows that foreign affiliate performance varies noticeably both under separate and joint subnational institutions. The results suggest that economic, political, and social institutions separately have a positive relationship with foreign affiliate performance, and mutually substitute for each other in facilitating foreign affiliate performance. Furthermore, economic, political, and social institutions can more facilitate performance of foreign affiliate with larger size, or larger innovative outputs. The contributions and implications...

Bank Foreign Affiliate Performance in the Face of Pervasive and Arbitrary Corruption

This study investigates the financial performance of foreign bank affiliates in light of their experience with pervasive and arbitrary corruption. To achieve this, we draw on the resource dependence theory and the institutional theory to explain how pervasiveness and arbitrariness affect financial performance through operating costs, risks of defaults and business growth. Using data on 122 foreign bank affiliates in 37 countries, we find that pervasiveness has a negative influence on the affiliate's performance, and, the joint interaction of pervasiveness and arbitrariness strengthens this relationship. The latter is significant for affiliates operating in developing countries, which may indicate that arbitrariness is damaging when corruption is pervasive. This study advances the literature on corruption at firm‐level, and the literature on bank internationalization. Moreover, findings have implications for managers, who need to recognize how the interaction of these two dimensions of corruption compromise their foreign operations.

TNC’s global characteristics and subsidiaries’ performance across European regions

There is significant regional variation in the performance of foreign affiliates in Europe. The aim of this paper is to examine whether differences in their performance can be explained by the characteristics of the corporate group to which they belong. To this end, we develop a novel procedure that allows us to control for the characteristics of the groups to which each subsidiary belongs. These characteristics include the geographical spread of the group, the total number of subsidiaries and complexity of internal hierarchies, and the degree of industry diversification within the group. We also control for the different institutional characteristics at the regional level. We find that subsidiaries belonging to geographically more widely spread but relatively less diversified TNC groups have superior performance. The results also suggest that regions with quality institutions attract affiliates of such high-performance groups.

The performance of foreign affiliates in German manufacturing: evidence from a new database

This study presents the first investigation into the performance of foreign-controlled enterprises in German manufacturing, based on new micro-data from official statistics. A comprehensive set of performance variables is examined, not only by comparing unconditional mean values but also by accounting for other determinants and differences across distributions. The analysis reveals a foreign ownership performance premium with regard to productivity, research and development, export intensities, and average wages. Only profitability seems not to differ from German-owned enterprises. Results are verified by varying comparison groups of indigenous firms and separating for high- and low-tech sectors. Furthermore, a breakdown by country of origin and type of group head shows considerable heterogeneity within the group of foreign-controlled affiliates in Germany.

Regional Institutional Development and Foreign Affiliate Performance

Drawing on the institutional-based view, this paper sheds light on the influence of the development of subnational institutions within a host country on foreign affiliate performance. Using 186,158 firm-year cases in 28 subnational regions of China, we find that the levels of the development of regional economic and social institutions have positive curvilinear impacts on the level of foreign affiliate performance and negative curvilinear influences on variation in that performance. However, the impacts of regional political institutions on foreign affiliate performance differ from those of regional economic and social institutions.

Ownership Advantages and Firm Factors Influencing Performance of Foreign Affiliates in Japan

This empirical study explores the impact of knowledge development factors, parent firm-specific and subsidiarycharacteristics on foreign affiliated performance. First, we examine the ownership and performance (based onreturn on asset, return on sales and profitability) of foreign affiliated in Japan. Second, we extend the subsidiary’sfactors with parent company’s firm factors in order to analyze the performance and ownership advantages basedon wholly owned subsidiary (WOS) and international joint venture (IJV). Third, we explore the relationshipbetween firm factors and foreign ownership ratio.Our finding suggested that first, when a subsidiary operates inthe manufacturing industry; MNCs prefer to have a majority of equity ownership.Second, the factors of industry,foreign employees and size of parent firm and subsidiary, demonstrate a statistically significant on performance.Finally, our findings indicate that foreign ownership ratio has a positive relationship with knowledge transferfactors, import and export ratio of foreign affiliates.

Internationalisation and Economic Performance of Enterprises: Evidence from Polish Firm‐level Data

AbstractThis article provides evidence on the relative performance of internationalised firms using Polish firm‐level data, spanning the period 1996–2005 and covering all medium and large enterprises. We distinguish between three modes of internationalisation: foreign direct investment, exporting and importing of capital goods. Our results point strongly at the superior performance of foreign affiliates vs domestic firms, exporters vs non‐exporters, and importers vs non‐importers: internationalised firms are larger, more capital intensive, pay higher wages and are more productive than purely domestic firms. Foreign ownership is the strongest factor accounting for gains from internationalisation. The premia from exporting are substantially lower, though also significantly positive. The performance of capital goods importers is also higher compared to non‐importers and is to some extent related to their involvement in other types of international activity. The results are robust to the choice of specification and productivity estimator. The analysed enterprises recorded a sizeable and broad‐based productivity improvement over the period under consideration. Not only the initial levels of productivity of exporters, importers and foreign affiliates were on average significantly higher that those of their non‐internationalised counterparts, but they also recorded faster productivity gains (manifested in increasing productivity premia), so that the discrepancies grew even larger. We also perform the analysis of productivity spillovers from internationalised firms onto own, downstream and upstream sectors. We find evidence of significant horizontal and backward spillovers from all three types of international activity. Our results suggest that trade externalities are rather of a horizontal nature, while those related to foreign direct investment operate mainly via backward linkages.

Does subnational region matter? Foreign affiliate performance in the United states and China

AbstractThis study examines the extent to which subnational regions can explain foreign affiliate performance in two host country settings, the United States and China, the world's two largest economies at polar ends of the economic spectrum (i.e., an advanced versus an emerging economy). Our results suggest that the subnational region is significant in explaining foreign affiliate performance, thus confirming its importance as an additional unit of analysis for firm performance. This study also shows that the effects of subnational region are far stronger in China than they are in the United States, thus suggesting that regional differences are more critical in their explanatory power for firm performance in emerging economies than they are in advanced economies. Copyright © 2010 John Wiley & Sons, Ltd.